private investment in risk management as a tool for the promotion of competitiveness and trade...

Private investment in Private investment in risk management risk management

as a tool for the as a tool for the promotion of promotion of

competitiveness and competitiveness and tradetrade

Presentation by Ricardo Zapata MartíPresentation by Ricardo Zapata MartíDisaster Assessment Focal Point, CEPALDisaster Assessment Focal Point, CEPAL

Regional Conference on Disaster Risk Reduction in Central Regional Conference on Disaster Risk Reduction in Central America - Planning and Policies for a Safe FutureAmerica - Planning and Policies for a Safe Future

Integration enhancement: creation of policies and regulations Integration enhancement: creation of policies and regulations that respond to challenges and opportunities that respond to challenges and opportunities

San Salvador, August 15-18, 2005San Salvador, August 15-18, 2005CEPREDENAC- U.S. SOUTHERN COMMANDCEPREDENAC- U.S. SOUTHERN COMMAND

CEPAL 2R.Zapata-Martí

Difference between Difference between disaster management and disaster management and risk management risk management Emergency managementEmergency management Quantification of damages, losses and Quantification of damages, losses and

needs needs Sizing and duration of the needsSizing and duration of the needs

Emergency and reestablishment of basic services Emergency and reestablishment of basic services Return to normality Return to normality Strengthened reconstruction (do not rebuild Strengthened reconstruction (do not rebuild

vulnerability)vulnerability) Mitigation and preventionMitigation and prevention Risk management improvement Risk management improvement


How risk is defined, How risk is defined, generated and assumed generated and assumed Risk as a complex formula of hazard Risk as a complex formula of hazard

(threat) and existing and built (threat) and existing and built infrastructure infrastructure

It is human intervention that generates It is human intervention that generates (increases, decreases or spreads) risk (increases, decreases or spreads) risk

Risk is suffered by society as a whole at Risk is suffered by society as a whole at several levels of damage, losses and needs several levels of damage, losses and needs

Risk is generally absorbed by the State, in Risk is generally absorbed by the State, in great extentgreat extent


Responsibility and risk Responsibility and risk transferencetransference Risk responsibility is not only for the State:Risk responsibility is not only for the State:

Social responsibilitySocial responsibility Community actionCommunity action Private sector participationPrivate sector participation

Risk transference implies:Risk transference implies: Investment in mitigation and prevention as part Investment in mitigation and prevention as part

of social and economic profitability of social and economic profitability The use of institutional and financial tools and The use of institutional and financial tools and

policies to reduce it policies to reduce it


Risk, competitiveness and Risk, competitiveness and sustainability sustainability Competitiveness goes beyond low-cost Competitiveness goes beyond low-cost

production and low-price marketing production and low-price marketing Risk results from an inadequate assessment Risk results from an inadequate assessment

of sustainability of sustainability Sustainability implies Sustainability implies

Adequate use of natural resources by managing Adequate use of natural resources by managing the environment to preserve it and to prevent the environment to preserve it and to prevent deterioration deterioration

To sustain economic growth rates (production, To sustain economic growth rates (production, trade and investment) at a suitable level in time trade and investment) at a suitable level in time (avoid fluctuations, sudden drops and (avoid fluctuations, sudden drops and deceleration)deceleration)


Risk and promotion of Risk and promotion of trade and competitiveness trade and competitiveness Competitiveness cannot leave Competitiveness cannot leave

risk out, it has to assume it risk out, it has to assume it Trade promotion must include Trade promotion must include

the trade of risk-reducing goods the trade of risk-reducing goods and services and services There are significant business There are significant business

opportunities in the form of goods opportunities in the form of goods and services and services


Risk assessment is Risk assessment is necessary for making necessary for making decisionsdecisions Risk can be assessed Risk can be assessed

Ex post based on past damages and Ex post based on past damages and losses (use of CEPAL methodology) losses (use of CEPAL methodology)

Ex ante based onEx ante based on Consideration of worst-case scenarios Consideration of worst-case scenarios

(design events)(design events) Measuring damages not caused by Measuring damages not caused by

adequate prevention, mitigation and adequate prevention, mitigation and investment (cost-benefit analysis)investment (cost-benefit analysis)


Assessment MethodologyAssessment Methodology

Damage to Damage to Assets orAssets or

CapitalCapital

Variation of Variation of economic flowseconomic flows

Asset Asset reconstructionreconstruction

- Changes in - Changes in macroeconomic macroeconomic behavior and impact on behavior and impact on wellbeing wellbeing

Financing gap Financing gap (fiscal and (fiscal and investment investment

portfolio)portfolio)

CycloneCycloneor or

hurricahurricanene


Total damage breakdownTotal damage breakdown

•Direct damageDirect damage•Indirect effectsIndirect effects

• Asset lossesAsset losses• Production lossesProduction losses• Cost increaseCost increase• Income reductionIncome reduction

•Public sectorPublic sectorPrivate sectorPrivate sector

Reconstruction costsReconstruction costs

Effects on the economyEffects on the economy

Primary damagesPrimary damages

Secondary effectsSecondary effects

Tertiary effectsTertiary effects

Public investmentPublic investment

Private investmentPrivate investmentReconstructionReconstruction

PortfolioPortfolio(internal and external (internal and external

resources)resources)


EFFECT OF A SERIES OF DISASTERS ON GROSS EFFECT OF A SERIES OF DISASTERS ON GROSS CAPITAL FORMATION CAPITAL FORMATION

** *

*TIME

GR

OS

S C

AP

ITA

L F

OR

MA

TIO

N

“DEVELOPING” COUNTRIESINDUSTRIALIZED COUNTRIES* DISASTER


GDP growth in Honduras

- 2.0

- 1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1997 1998 1999 2000 2001 2002 2003 2004

Growth without Mitch and drought Growth with Mitch and drought

MITCH

DROUGHT


GDP growht in Nicaragua

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1996 1997 1998 1999 2000 2001 2002 2003 2004

Growth without disasters Growth with Mitch and drought

MITCH

DROUGHT


GDP growth in El Salvador

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1996 1997 1998 1999 2000 2001 2002 2003 2004

Growth without disasters Growth with disasters

MITCH

EARTHQUAKE

DROUGHT


GDP growth in Guatemala

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1997 1998 1999 2000 2001 2002 2003 2004


MITCH

DROUGTH


GDP growth in Costa Rica

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1996 1997 1998 1999 2000 2001 2002 2003 2004


MITCH

SEQUIA


Disaster impact on Latin Disaster impact on Latin American and the Caribbean American and the Caribbean Between 1970 and 2001, natural disasters Between 1970 and 2001, natural disasters

provoked 246.569 deaths, affected 144 provoked 246.569 deaths, affected 144 million people in several magnitudes and million people in several magnitudes and caused material losses estimated at nearly caused material losses estimated at nearly 68.600 million dollars in Latin America and 68.600 million dollars in Latin America and the Caribbean, reported the United Nations the Caribbean, reported the United Nations Program for the Environment. (FIN/2005)Program for the Environment. (FIN/2005)


Role-Players: can be public and Role-Players: can be public and private, at a local or central level private, at a local or central level

STAKEHOLDERSSTAKEHOLDERS-Beneficiary populationBeneficiary population

- Service providersService providers

DONORSDONORS-MultidisciplinaryMultidisciplinary

- Academic Academic -Technical associationsTechnical associations

- Political levelPolitical level

FINANCING SOURCEFINANCING SOURCE-PublicPublic-PrivatePrivate

- InternationalInternational- NGONGO

MITIGATIONMITIGATION


Human impact of disasters in Latin American and the Caribbean DATEDATE AFFECTED POPULATION AFFECTED POPULATION

DeadDead Direct victims (primary Direct victims (primary effect)effect)

1972-19801972-1980 38,04238,042 4,229,2604,229,260

1980-19901980-1990 33,63833,638 5,442,5005,442,500

1990-19991990-1999 31,08631,086 2,518,5082,518,508

2000-20042000-2004 7,0477,047 12,911,89012,911,890

1972-20041972-2004 109,813109,813 25,102,15825,102,158

Annual average (simple, Annual average (simple, taking into account only taking into account only the damages reported by the damages reported by CEPAL assessments, CEPAL assessments, non-scientific, non-non-scientific, non-comprehensive sample)comprehensive sample)

3,7873,787 865,592865,592


Economic impact of disasters (based on CEPAL assessments)

DATEDATE TOTAL DAMAGE (millions of dollars of 2004)TOTAL DAMAGE (millions of dollars of 2004)

TOTALSTOTALS DIRECT (Asset DIRECT (Asset or capital or capital damage)damage)

INDIRECT INDIRECT (Cash Flow (Cash Flow

losses)losses)

Effects on Effects on external external sector sector

1972-19801972-1980 78,085.1478,085.14 49,826.6149,826.61 28,258.5328,258.53 24,197.7924,197.79

1980-19901980-1990 100,497.13100,497.13 70,886.1170,886.11 29,611.0229,611.02 40,671.1040,671.10

1990-19991990-1999 27,965.5727,965.57 14,364.4614,364.46 13,601.1113,601.11 7,466.837,466.83

2000-20042000-2004 18,199.9218,199.92 11,229.8411,229.84 5,470.085,470.08 3,296.233,296.23

1972-20041972-2004 225,756.39225,756.39 145,797.11145,797.11 79,959.2879,959.28 77,149.8177,149.81

Annual Annual AverageAverage

7,784.707,784.70 5,027.495,027.49 2,757.222,757.22 2,660.342,660.34


HURRICANES IN THE CARIBBEAN, 2004HURRICANES IN THE CARIBBEAN, 2004Relative and absolute impact of losses and Relative and absolute impact of losses and damages damages

551 3,432 296 889 595296

183.00%

1.70%

8.00%

10.50%

212.00%

7.30%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

HurricanesFrances

and Jeanne

HurricaneIvan

TropicalStorm

Jeanne

HurricaneIvan

HurricaneJeanne

HurricaneIvan

Bahamas CaymanIslands

DominicanRepublic

Grenada Haiti Jamaica

US

$ m

illi

on

s

1.00%

10.00%

100.00%

1000.00%

Economic Impact, US$ million Impact as % of GDP


Factors to considerFactors to consider

TEMPORARY FACTORTEMPORARY FACTORForeseen RedundancyForeseen Redundancy

Foreseeable redundancy time (alternate provision)Foreseeable redundancy time (alternate provision)

TECHNICAL FACTORTECHNICAL FACTOR-Execution capabilityExecution capability

- Absorption capabilityAbsorption capability-Management capabilityManagement capability

COST FACTORCOST FACTOR- Minimum and maximum Minimum and maximum

tolerance levelstolerance levels-Financial capacityFinancial capacity

(internal resources, access to credit)(internal resources, access to credit)

KEEP THE SERVICE KEEP THE SERVICE AND FUNCTIONAND FUNCTION


Need for policies and Need for policies and regulations regulations The value of prevention, mitigation and risk The value of prevention, mitigation and risk

management is not evident in the market management is not evident in the market indications. indications.

The State has to play a role in promotion The State has to play a role in promotion and regulation in risk situationsand regulation in risk situations

Strengthen and enforce regulations Strengthen and enforce regulations regarding:regarding: Human settlements and land use Human settlements and land use Construction codes Construction codes Responsibility for the risk generated by Responsibility for the risk generated by

investments investments Penalties for the risk generated or not assumed Penalties for the risk generated or not assumed


Why in the integration Why in the integration scenarioscenario Risk is not restricted by national borders Risk is not restricted by national borders

(i.e. the effects of a disaster extend to the (i.e. the effects of a disaster extend to the nations, for example, Hurricane Mitch or the nations, for example, Hurricane Mitch or the indirect consequences in other countries of indirect consequences in other countries of the damage caused in one of them)the damage caused in one of them)

Adopting regional policies and regulations Adopting regional policies and regulations increases competitiveness increases competitiveness Improving the external image of the region and all Improving the external image of the region and all

the countries the countries Avoiding adverse competition among countries Avoiding adverse competition among countries

leading to the adoption of lax policies to appear leading to the adoption of lax policies to appear more attractive more attractive


Thank youThank you

Ricardo Zapata-MartiDisaster Evaluation

Focal PointCEPAL Subregional Headquarters

in Mexico [email protected]

www.cepal.org/mexico(disasters)

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