2.7 Layering Risk Financing Instruments for Adaptive Social Protection: The Case of Kenya

For example, insurance tends to be cost-effective only for extreme events, while contingency funds are more cost-effective for more frequent, lower intensity, and thus less costly shocks. Combining different instruments and using different ones for different types of shocks— known as “risk layering”—can derive significant cost savings. Which instruments will be most appropriate for a given adaptive social safety net and country differs from case to case, depending on varying risk profiles, associated costs, and previously existing response funding arrangements. The most appropriate mix of instruments can be adopted in the form of a disaster risk financing strategy (box 2.7).

BOX 2.7: Layering Risk Financing Instruments for Adaptive Social Protection: The Case of Kenya The Hunger Safety Net Program (HSNP) provides regular cash transfers of around US$27 per month to more than 100,000 extremely poor households in Northern Kenya. The HSNP also includes a scalability mechanism that provides temporary emergency cash transfers to affected households following weather-related disasters.a Since 2014, it has been triggered more than 20 times and disbursed more than US$26 million to more than 275,000 households.

The HSNP scale-ups are triggered using an early warning indicator—the vegetation condition index, which reflects drought conditions on the ground. When the pre-agreed trigger threshold is met, poor households in drought-affected areas receive temporary transfers, up to a maximum of 75 percent of the population in affected areas.b HSNP scale-ups are currently financed through the government`s budget and also supported by the World Bank and the United Kingdom through various operations. In 2020, the government adopted the HSNP financing plan, which is embedded in the country’s National Disaster Risk Financing Strategy approved by the government in May 2018.c This sets out a financing approach to meet the cost of transfers in 98 percent of drought years via a risk-layering approach: for more frequent, smaller (and thus less costly) droughts, scale-up funding would come from an emergency transfer fund, replenished by annual budget allocations. For the more exceptional and expensive severe droughts, the Government of Kenya is considering the option of funding to come from a sovereign insurance policy. This combined approach aims to protect the government budget against high HSNP payouts and to reduce the volatility of government contributions. The sovereign insurance policy has not yet been purchased, and the government has so far covered the financing needs through budget allocations.d

a. World Bank (2018a). b. Calcutt, Maher, and Fitzgibbon (2021). c. World Bank (forthcoming a). d. World Bank (forthcoming b).

SEIZING THE PANDEMIC MOMENT: ADVANCING SOCIAL PROTECTION IN AFRICA

The COVID-19 pandemic has accelerated the dynamism in Africa’s emerging social protection systems, underscoring their critical importance for equity, resilience, opportunity, and jobs. First, past investments in laying the foundations for targeted cash transfer programs and their delivery systems have paid off for many countries, as they successfully leveraged these programs to protect people from the impacts of the pandemic shock to the economy. The scale and robustness of cash transfer programs and delivery systems often determined the pace and scale of the pandemic response. Likewise, complementary programs (“plus”) focused on productive inclusion play an important role as the focus of the pandemic response is evolving from the immediate shock response toward support for the recovery and relaunch of livelihoods and jobs among the poor. Second, the lessons from the pandemic response point toward a dynamic development agenda for Africa’s social protection systems. Chief among them is the need to diversify the objectives and instruments for expanded coverage and reach, to strengthen adaptive social protection delivery systems and leverage new technologies, and to enhance financing for social protection for greater domestic commitments and spending efficiency.

Technological advances enable a much bolder agenda of building more robust systems that can have impact at scale. The COVID-19 pandemic may well turn out to be a turning point in the way social protection is delivered, with a rapid transition toward deployment of digital tools and novel data in the pursuit of offering social protection for all. Several countries in Africa leapfrogged in the design and delivery of their COVID-19 emergency cash transfer programs through adoption of digital tools for intake, registration, and payment and nontraditional data to select beneficiaries. Such tools will be critical for the capacity of social protection systems to expand in response to more frequent and consequential shocks, especially caused by climate change. Digital payments are core for getting cash to beneficiaries on time, while dynamic registries with up-to-date data on poor and vulnerable households as well as unique identification of individuals will enhance the targeting, and impacts, of programs. At the same time, a greater embrace of digital innovation in social protection design and delivery needs to go hand in hand with strengthening data protection, data governance, and cybersecurity.

This is the moment for African governments to embrace recent innovations and modernize their social protection systems. Progress on reform will be enabled and accelerated by enhancing political support for social protection—which ultimately may lead to more financing for the sector being available—and efforts to clarify and strengthen institutions. While external technical and financing support will remain important, building more robust systems requires greater ownership and domestic financial commitments to social protection. Investing in people pays off.