Background

According to the Government Financial Statements (audited), State Asset value per December 31, 2016 is Rp2,188,359,011,696,645,00. State assets are spread from the western part of Indonesia, Sabang Island, to the eastern part of Indonesia, Merauke. Maintaining a great number of assets is not an easy issue. State Fixed Assets are generally intended to be used for public services.

However, in certain circumstances, there are several causes which make the state assets not able to be used properly or become prematurely obsolete. One of them is natural disaster. Indonesia is located on the confluence of three major tectonic plates, the Indo-Australian, Eurasian and Pacific plates which are prone to collisions that can lead to earthquakes. Most of Indonesia areas are located in the path of The Pacific Ring of Fire, a series of lines of active volcanoes in the world.

An alternative solution to address the risk of failed assets caused by natural disasters is using the risk transfer mechanism. In general principle, the risk transfer mechanism can be implemented in all public assets. However, considering the limited national budget, the government needs to prioritize which assets to be secured. The top priority is obviously for public assets in disaster-prone areas.

Recently, the central government have started to secure its fixed assets by using insurance. Mitigation and disaster risk transfer mechanism becomes important due to the increase of natural disasters in Indonesia which may lead to a fiscal shock in the national budget. The data shows that in the period of January until November 2017, the National Disaster Mitigation Agency noted there were 1,911 incidents of natural disaster that occurred in Indonesia, 611 of which were flooding.

Public Asset Management

According to the Government Regulation number 27/2014 about State/Local Government Asset Management, the responsibility for managing the assets is clearly stipulated. Related to this regulation, it can be defined that State Assets are all assets purchased or obtained at the state budget or other legitimate acquisition’s expense. Meanwhile, the Local Government Assets are all assets purchased of the local government budget or other legitimate acquisitions’ expense. The assets which then become the property of the state or local government are based on the funds spent on them.

Canada Transportation Association defines asset management as "a strategy employing a comprehensive business people, information and technology to effectively and efficiently allocate available funds amongst competing asset valued and needs."

Another definition of assets under management of Danylo, NH and A. Lemer is “a methodology to efficiently andequitably allocate resources amongst valid and competing goals and objectives". Kaganova and McKellar define asset management as "Property asset management that can be defined as the process of decision making and implementation related to the acquisition, use, and disposal of real property."

Although asset management can be presented according to the types of asset or concentration of activities, the writer agrees with some experts about the definitions of asset management. By stating there is no exact definition of asset management, the definition is still not definite. Nevertheless, the writer can conclude that asset management process is a process starting from planning to disposal of asset which is used by an organization or line ministries/agencies.

According to the Government Financial Statements, State Asset value per December 31, 2016 amounting to Rp 2,188,359,011,696,645 million consists of inventories, fixed assets and other assets.

As an illustration, the amount of State Assets in the province of Aceh on December 31, 2012 (DG SAM Aceh Regional Office Report) was Rp. 34,614,700,302,096. 92.49% or Rp. 32,013,695,105,168.00 of which are Fixed Assets including Land, Buildings, Equipment and Machineries, and Roads Water Irrigation and Network. If a big earthquake occurred in Aceh in that period, the maximum loss that would occur was Rp. 3,919,552,724,701.00 (considering the loss in damaged buildings only), it means that 11% of total assets of the State Assets are located in the province of Aceh. This is just a simple calculation if earthquake occurred in the province of Aceh. However, the state government has not implemented the risk transfer mechanism in their asset management yet.

Natural Disaster and Climate Change

Underjoint State-Australian Government Natural Disaster Relief and Recovery Arrangements (NDRAA), a natural disaster is defined as a serious disruption to a community or region caused by the impact of a naturally occurring rapid on set event that threatens or causes death, injury or damage to property or the environment and which requires significant and coordinated multi-agency and community response.

The definitions of climate change in Intergovernmental Panel on Climate Change (IPCC) usage refer to a change in the state of the climate that can be identified (e.g. using statistical tests) by changes in the mean and/or the variability of its properties and that persists for an extended period, typically decades or longer. It refers to any change in climate over time, whether due to natural variability or as a result of human activity. This usage differs from that in the United Nations Framework Convention on Climate Change (UNFCCC), where climate change refers to a change of climate that is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and that is in addition to natural climate variability observed over comparable time periods.

The Geographic location of Indonesia which is on the pacific ring of fire in the Southeast Asia region aggravates the climate change conditions. The state assets which are located in disaster-prone and climate change-affected areas (continuous rains that causes flooding or continuous heat that causes forest fires) will certainly decline in its function more quickly or it becomes obsolete.

Over the past decade, several researches on the impact of natural disasters or climate changes on humans or communities were conducted, but only a few examined the impact on state assets. Government policies tended to be reactive instead of proactive. The government has not been able to mitigate the risk of asset management in disaster-prone areas as well as in climate change-affected areas.

Potential losses due to the asset management arising from natural disasters will result in a significant economic impact. Tsunami in Aceh and Earthquake in Yogyakarta and West Sumatra that occurred a few years ago estimated left the following losses:

Source: GFDRR (2012)

On climate change, sometimes its impacts are felt in short term (annual flood period) and in long term (5-year flood cycle). At the moment, the impacts of climate change will fall at the same time. For example, the 5-year flood cycle that occurred in the capital city of Indonesia, Jakarta. Previously, major floods happened every 5 year, namely in 1997, 2002, and 2007. Because of the climate change, the cycle of major floods changed. The major floods that were expected to hit Jakarta in 2012 didn't occur. In facts it struck the city in 2013 and 2014. This flood caused devastating impacts and disrupted economic condition in Jakarta. In January 2014 the floods didn't only hit Jakarta, but also its satellite cities, such as Tangerang, Depok, Bogor and Bekasi in West Java

The following are the estimated losses caused by the major floods occurring in 2007 taken from the National Planning and Development Agency:

Source: National Planning and Development Agency (2007)

From the beginning of the year of 2017 until December 4, 2017, the National Disaster Mitigation Agency recorded that 2,175 natural disasters occurred in Indonesia which included floods (737), tornadoes (651), landslides (577), forest and land fires (96), floods and landslides (67), drought (19) earthquakes (18), abrasion (8), and volcanic eruptions (2). It can be concluded that natural disasters in Indonesia increase from year to year.

It was recorded that 335 people died, 969 people got injured, and 3.22 million people were displaced and suffered in the disaster. 31,746 houses were damaged and 347,813 thousands of health, education and worship facilities were submerged and damaged (BNPB 2017).

Transfer Risk Mechanism

In recent years, the frequency of disasters in Indonesia is quite high, the risk of assets management in disaster-prone areas and climate change-affected areas is also high. Therefore, a special effort is needed to address these risks, it is known as risk mitigation. There are quite a lot of definitions of risk. Djohanputro (2008, 32) defines risk as uncertainties whose probabilities of events can be measured, or uncertainties which can quantified the losses. According to Djohanputro (2008, 33) the comparison between the risks and uncertainties is described in the table below.

Source: Corporate Risk Management (2008)

According to Fahmi (2010),several alternative risk managements are as follows:

1. Minimizing risk. Decision to minimize the risk is made by limiting its high risk decision taking in order to be able to be controlled by management.
2. Transferring the risk. Decisions of risk transfer are made by transferring a partor the whole risk to other parties.
3. Controlling the risk. Decisions of risk control are made ​​by making anticipationpolicy toward the onset of risk before it happens.
4. Funding risk. Decisions of risk funding are made by providing some funds to anticipate the risk at might happen in the future.

Conclusion

A suitable risk transfer approach in managing the assets related to assets which are located in disaster-prone areas and assets affected by climate changes is by using insurance. This risk transfer is categorized as fiscal transfers risk on asset management. To prepare the right strategy in determining the risk transfer mechanism (for comprehensive study of how the premium to be paid, what kind of assets that need to be insured and how the methods of insurance are applied), in-depth research and comprehensive mitigation involving the National Development Planning Agency, National Agency for Disaster Management, Fiscal Policy Office MoF and other related parties are needed.

The risk transfer is important, but appropriate assets to be covered by the insurer and the insurance company involved are also important.

Written by Acep Hadinata

Deputy Director of Legal and Public Relation, DG SAM

References

Republic of Indonesia. (2007). Act No. 24 of 2007, Disaster Management

________.(2006). Government Regulation No. 27 Year 2014, State/Local Government Asset Management.

________.(2013). Central Government Financial Report, year ended December 31, 2016.

________.(2012). State Asset Report, DG SAM Aceh Regional Office year ended December 31, 2012.

Cummin J David and Mahul Olivier (2009). Catastrophe Risk Financing in Developing Countries. Principles for Public Intervention. The Word Bank, Washington DC.

Paul A. Raschky.(2013). Estimating the Effects of West Sumatra Public Asset Insurance Program on Short-Term Recovery After The September 2009 Earthquake. ERIA Discussion Paper Series, 2013.

Hadinata, Acep (2011).Handbook, Management Asset, Finance Diploma Program Specialization in Handling State Receivables and Auction. Jakarta:State College of Accountancy.

Jauri, Ahmad. (2013). Using Insurance Services for State Asset In The Disaster Prone Areas. Jakarta, thesis Diploma Program in Accounting,State College of Accountancy.

Djohanputro,Bramantyo. (2008). Corporate Risk Management. Jakarta: PPM.

Fahmi, Irham. (2010). Risk Management: Theory, Cases, andSolutions. Jakarta: Publisher Alfabeta.

The world Bank East Asia Pacific and South Asia Region (2008). A Workshop on Disaster Risk Reduction and Risk Transfer: Toward Concrete Actionin South Asia and East Asia and Pacific.

Deloitte AccessEconomics. (2013). Building Our Nation’s Resilienceto Natural Disaster. Australian Bussines Roundatable for Disaster Resilience and Safer Communities.

Michael K. Lindell.(____). Recovery and Reconstruction After Disaster. Texas A&M University, College Station, TX, USA.

http://www.dpi.nsw.gov.au/__data/assets/pdf_file/0016/413026/Policy-O-103-natural-disaster-reporting-and-declaration.pdf

http://www.ipcc.ch/publications_and_data/ar4/syr/en/mains1.html

http://understandinsurance.com.au/when-should-you-purchase-insurance