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

1. Private investment in risk management as a tool for the promotion of competitiveness and trade Presentation by Ricardo Zapata Martí Disaster Assessment Focal Point, CEPAL Regional Conference on Disaster Risk Reduction in Central America - Planning and Policies for a Safe Future Integration enhancement: creation of policies and regulations that respond to challenges and opportunities San Salvador, August 15-18, 2005 CEPREDENAC- U.S. SOUTHERN COMMAND

2. Difference between disaster management and risk management • Emergency management • Quantification of damages, losses and needs • Sizing and duration of the needs • Emergency and reestablishment of basic services • Return to normality • Strengthened reconstruction (do not rebuild vulnerability) • Mitigation and prevention • Risk management improvement CEPAL

3. How risk is defined, generated and assumed • Risk as a complex formula of hazard (threat) and existing and built infrastructure • It is human intervention that generates (increases, decreases or spreads) risk • Risk is suffered by society as a whole at several levels of damage, losses and needs • Risk is generally absorbed by the State, in great extent CEPAL

4. Responsibility and risk transference • Risk responsibility is not only for the State: • Social responsibility • Community action • Private sector participation • Risk transference implies: • Investment in mitigation and prevention as part of social and economic profitability • The use of institutional and financial tools and policies to reduce it CEPAL

5. Risk, competitiveness and sustainability • Competitiveness goes beyond low-cost production and low-price marketing • Risk results from an inadequate assessment of sustainability • Sustainability implies • Adequate use of natural resources by managing the environment to preserve it and to prevent deterioration • To sustain economic growth rates (production, trade and investment) at a suitable level in time (avoid fluctuations, sudden drops and deceleration) CEPAL

6. Risk and promotion of trade and competitiveness • Competitiveness cannot leave risk out, it has to assume it • Trade promotion must include the trade of risk-reducing goods and services • There are significant business opportunities in the form of goods and services CEPAL

7. Risk assessment is necessary for making decisions • Risk can be assessed • Ex post based on past damages and losses (use of CEPAL methodology) • Ex ante based on • Consideration of worst-case scenarios (design events) • Measuring damages not caused by adequate prevention, mitigation and investment (cost-benefit analysis) CEPAL

8. Assessment Methodology Asset reconstruction Earthquake Damage to Assets or Capital Financing gap (fiscal and investment portfolio) Tsunami Variation of economic flows Cyclone or hurricane - Changes in macroeconomic behavior and impact on wellbeing CEPAL

9. Total damage breakdown • Direct damage • Indirect effects Reconstruction costs Effects on the economy • Asset losses • Production losses • Cost increase • Income reduction Primary damages Secondary effects Tertiary effects • Public sectorPrivate sector Public investment Reconstruction Portfolio (internal and external resources) Private investment CEPAL

10. * DISASTER * * * “DEVELOPING” COUNTRIES INDUSTRIALIZED COUNTRIES EFFECT OF A SERIES OF DISASTERS ON GROSS CAPITAL FORMATION GROSS CAPITAL FORMATION * TIME CEPAL

11. MITCH DROUGHT CEPAL

12. DROUGHT MITCH CEPAL

13. MITCH DROUGHT EARTHQUAKE CEPAL

14. MITCH DROUGTH CEPAL

15. MITCH SEQUIA CEPAL

16. Disaster impact on Latin American and the Caribbean • Between 1970 and 2001, natural disasters provoked 246.569 deaths, affected 144 million people in several magnitudes and caused material losses estimated at nearly 68.600 million dollars in Latin America and the Caribbean, reported the United Nations Program for the Environment. (FIN/2005) CEPAL

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

18. Human impact of disasters in Latin American and the Caribbean CEPAL

19. Economic impact of disasters (based on CEPAL assessments) CEPAL

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

21. Factors to consider CEPAL

22. Need for policies and regulations • The value of prevention, mitigation and risk management is not evident in the market indications. • The State has to play a role in promotion and regulation in risk situations • Strengthen and enforce regulations regarding: • Human settlements and land use • Construction codes • Responsibility for the risk generated by investments • Penalties for the risk generated or not assumed CEPAL

23. Why in the integration scenario • Risk is not restricted by national borders (i.e. the effects of a disaster extend to the nations, for example, Hurricane Mitch or the indirect consequences in other countries of the damage caused in one of them) • Adopting regional policies and regulations increases competitiveness • Improving the external image of the region and all the countries • Avoiding adverse competition among countries leading to the adoption of lax policies to appear more attractive CEPAL

24. Thank you Ricardo Zapata-Marti Disaster Evaluation Focal Point CEPAL Subregional Headquarters in Mexico ricardo.zapata@cepal.org www.cepal.org/mexico (disasters) CEPAL