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The role of the public sector in de-risking global supply chains

As COVID-19 highlights the urgent need for more resilient and sustainable supply chains, insurance can play a key role in helping governments fund and maintain the necessary infrastructure.

The COVID-19 pandemic has accelerated a reshaping of global supply chains. As the crisis curtailed the flow of goods and services, troubling cracks have been exposed in global production and distribution processes. These include unpredictable supply, impaired transport and communication networks, interruptions in financing, as well as regulatory and political risks.

Organisations – both private and publicly owned, typically have little time to react to disruption brought about by natural disasters or pandemics. Those that have managed to stay afloat during this period have become painfully aware of the many risks and complexities in today’s global supply chains.

Amid this disruption, manufacturers have started to bring activities 'back home' or shift their operations to other markets, as they reconsider their production and sourcing strategies for the new reality. The Swiss Re Institute expects 20 percent of the current production capacity in China to move to other parts of Asia, fuelling demand for investment and commercial activity.

These changes will likely lead to the creation of parallel or multi-faceted value chains, with Southeast Asia likely to be a highly attractive location for duplicate production activities, on the back of the region’s competitive labour costs and strong growth potential. Governments need to be ready to support this transition, with economic stability, appropriate regulation, and openness to public/private partnerships that enhance local prosperity.

The need for resilience will drive change – are governments ready?

In a post-pandemic world, as firms prioritise resilience over cost, government policy, combined with effective public/private partnerships will be key to de-risking this transition to more sustainable supply chains.

Supply chain restructuring could yield close to USD 700 billion in additional investments, over a five-year transition period, pre-dominantly in markets such as South-East Asia. This is where governments need to create an environment for investment and growth. The World Bank reports that over the last few years Thailand, Malaysia and Vietnam have improved in 'ease of doing business', ahead of Indonesia and the Philippines. This view is based on an assessment of the rules and requirements affecting a business from inception through operation to wind-down, including processes such as dealing with construction permits, getting electricity, registering property, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.2 To facilitate growth and investment, public policy and regulation needs to promote effective trade, not hinder it, and leverage international competition to boost local prosperity.

The restructuring of supply chains must also consider the needs of a more sustainable and low-carbon world. The need for new investment in infrastructure gives governments, along with private investors, opportunity to build resilient and decarbonised supply chain models.

This includes initiatives such as enhancing grey infrastructure to be more sustainable, increasing the number of renewable energy facilities, and building with natural materials. Utilising technology to create efficiency and leveraging data to identify and predict risks also increases sustainability. In turn, these initiatives will create jobs, economic stability and more resilient communities.

Risks beyond COVID-19 – protecting economies from the impacts of multiple events

The COVID-19 situation has given the world a harsh reminder of the importance of taking a comprehensive view on risks, being prepared for a range of extreme events, and investing in the right safeguards. Previous natural disasters have shown the impacts of not doing so.

In 2011, the global semiconductor supply chain was disrupted by the Tohoku earthquake in Japan and the tsunami disaster that followed. At the time, Japan accounted for 20 percent of global output of semiconductors. Whilst the Japanese government activated emergency systems and resources, the impact of these twin calamities stalled production and the global supply chain for semiconductors for more than nine months.3

That same year, huge floods in Thailand had a similarly devastating effect on the supply chains of the automotive and electronic components sectors. Thai assembly lines were unable to produce the parts and components required to manufacture vehicles in Japan. The Thai government at the time was criticised for its lack of co-ordination in handling the crisis and its failure to request international aid.  Following this, the government spent $9.6 billion on flood prevention and water management initiatives. These included the construction of dams, reservoirs, floodways and flood diversion channels, as well as establishing a data system for water management and warning systems.4

These examples show that governments need to be fiscally resilient to deal with the impact of these sudden and unexpected shocks to their economies. As weather events and natural catastrophes remain an inevitable threat, governments need to ensure there is sufficient capacity and funding to deal with multiple events.

One way to develop the required resilience is to make use of insurance solutions to protect national budgets against natural and man-made disasters. This reduces post-disaster budget restructuring and funding delays and ensures that global supply chains and the economies they service, are more stable.

How insurers can support the public sector

Insurance is an important tool to help reduce and manage supply chain risks, providing protection against business disruption and the associated costs caused by extreme events.

Insurers are able to provide solutions for both the private and public sector - protecting assets, ensuring business continuity and enabling investment of both public and private funds. As one of the world’s leading providers of reinsurance and insurance solutions, Swiss Re not only offers risk transfer capacity to absorb the impact of extreme events, but also shares knowledge and expertise with clients and partners.

Insurance can also help accelerate growth and play a key role in developing more resilient infrastructure, by de-risking projects up front to help secure investment and provide more certain levels of return.

The immediate challenges of the COVID-19 pandemic - coupled with longer-term threats such as climate change - demand that governments be more financially prepared. Insurance helps to shield fiscal budgets from shocks, and ensure more resilient and sustainable global supply chains. This in turn, creates more resilient communities and economies.

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