Update Country Report Curaçao 14 Jul 2017

The relatively weak state of infrastructure in Latin America increases the impact of natural disasters in the region, both in economic and social terms. Every year, floods, hurricanes, earthquakes and droughts cost countries billions of dollars in damage, and the loss of thousands of lives. As climate change advances-increasing both the severity and frequency of some forms of natural disaster-it will become increasingly imperative that countries undertake more effective planning for mitigation and recovery, and invest in upgraded infrastructure that can better withstand adverse climatic events. Finding ways to address these challenges will be a major regional challenge in the coming years.

Latin America's infrastructure deficiencies leave the region particularly vulnerable to natural disasters. These include coastal flooding, intense rains and landslides, and extreme temperatures and drought conditions. Rapid population growth in major cities and poor or absent city planning leaves thousands of people vulnerable when disasters strike, increasing not just the physical but also the human cost of disasters. What's more, these incidents often hit already-vulnerable populations the hardest, adding significant socioeconomic costs to the high costs of repair to key infrastructure. This has been evident in the past two years, as the effects of the El Niño and La Niña weather phenomena have brought extreme drought to the Caribbean and Southern Cone, as well torrential rains and flooding in countries such as Peru, Chile, Paraguay, Argentina and Bolivia. In addition to thousands of preventable deaths, the World Bank estimates that natural disasters cost the region an estimated US$2bn a year in damage.

According to a recent report by the World Bank, Rethinking Infrastructure in Latin America and the Caribbean: Spending Better to Achieve More, as climate change advances, the effects of disasters are likely to become more frequent and more severe. Higher temperatures and a melting of the polar ice caps will reduce the seasonal distribution of stream flows and lead to less predictable weather patterns and more intense climate conditions. This will cause dry regions to become dryer and wet regions to become wetter, increasing the severity of droughts as well as torrential rains. More intense droughts will affect not only agricultural output, but also the capacity of hydroelectric projects, which are responsible for most of the region's power generation. More intense rainfall will increase the risk of flooding and landslides that damage transport infrastructure, in particular, and also overwhelm the region's sanitation systems.

New challenges require new planning

To better withstand these effects, the region will need to plan projects to address and mitigate the effects of changing conditions, as well as the additional demands that disasters will put on existing systems. More heat waves will exert more extreme pressure on electrical grids at the same time that droughts will exhaust the capacity of hydroelectric projects, which will require alternative power sources. Droughts will exert pressure on existing water supplies and require investment in greater water storage projects. Extreme rains will require the construction of protective dams and more resilient water treatment projects.

According to the World Bank report, although natural disasters in recent years have caused billions of dollars of damage to infrastructure , governments have so far focused more on reconstruction rather than adopting long-term plans to better weather these disasters. A desirable approach, the report argues, would be to invest in resilience planning. Although in the aftermath of disasters, governments often vow to rebuild better, few are at the present undertaking plans to address the longer-term effects of climate change. Such changes of plan can include moving key transport projects to less vulnerable zones, moving electric transmission cables underground and increasing the capacity of transmission systems. It also requires boosting energy and water efficiency in order to limit waste and help to slow the effects of climate change. A number of water utilities in the region-including in the Peruvian capital, Lima, and Quito, the capital of Ecuador-have undertaken risk studies to make their systems resilient in extreme weather events.

In their long-term planning, governments must also take account of changing socioeconomic needs, given that as countries move up the income ladder, demand for certain services will increase in line with urbanisation, including increased demand on electrical grids, greater road use and more pressure on sanitation. This also includes the construction of low-cost housing (to reduce unplanned slum building in vulnerable areas), and more efficient and well-priced public transportation.

In order to reduce the pressures of climate change, governments also need to limit their carbon footprint while expanding access to power, water and services. For example, around 22m people in the region lack access to power, 34m lack access to potable drinking water, and 106m do not have access to sanitation services. Large cities in the region, such as Mexico City and Lima, already suffer from regular water shortages-a trend that is likely to worsen. Improving this can include greater investment in renewable energy sources (something in which the regional already excels, with Latin America having the world's cleanest energy matrix), as well as adequate sanitation systems to effectively treat wastewater. Governments should also better invest and implement city planning initiatives and invest in public transportation to reduce traffic congestion and pollution.

Spending better, not more

Undertaking these initiatives in full will entail significant investment. However, assigning an exact cost is difficult given the distinct risks faced by different regions and the difficulty of measuring both the pace and effect of climate change. A World Bank study, Economics of Adaptation to Climate Change, estimated that properly preparing the region for climate change would cost around US$4bn per year more than the region currently spends.

At the moment Latin America falls well short in infrastructure spending to meet even basic needs, investing around 2.8% of GDP annually, compared with a developing world average of 5%. However, this average masks disparities between countries in the region, with the larger economies (Argentina, Brazil, Mexico) investing much less as a percentage of GDP than smaller ones. Bolivia, Costa Rica, Honduras, Nicaragua, Panama and Peru, for example, all invest more than 4% of GDP per year.

However, the World Bank emphasises that resilience planning need not cost more, as the region can instead prioritise those projects that have the most impact. Although priorities will be specific to each country and circumstance, the World Bank highlights improving access to power, electricity and sanitation as desirable goals. Although a project may represent a significant initial expense, the investment can represent savings in the long term, given that with such resilience planning infrastructure will be better able to withstand the effects of disaster. For example, the World Bank highlights a study from Peru that showed the cost of rebuilding and reconditioning water and sanitation infrastructure following the 2007 earthquakes was 27 times higher than if the system had initially been built with earthquake-resistant materials. In a similar vein, upgrading infrastructure and services in slums (which are often built haphazardly in Latin America) costs two to eight times more than if a community had benefitted from proper city planning.

Where it does pose an additional cost, countries should look to alternative forms of finance, especially given limited fiscal space. The World Bank advises the use of public-private partnerships (PPPs) to meet the infrastructure shortfall in planning resilient infrastructure. However, this requires appropriate frameworks, risk sharing, and financial and judicial security in order to work best. According to The Economist Intelligence Unit's Infrascope index for 2017, the region's capacity to undertake sustainable PPP infrastructure projects has improved in recent years, particularly with regard to legal and regulatory frameworks supporting PPPs. However, challenges in implementation and financing persist. Even despite these challenges, the use of PPPs is increasing as governments look for new means of promoting infrastructure investment, and these projects can offer additional benefits, such as promoting regional integration.

Long-term benefits

Addressing the challenges of natural disasters and climate change will continue to be one of the major issues facing Latin America and the Caribbean in the coming years. Although natural disasters are an inevitability for the region, adequate preparation can make a significant difference: compare the impact of earthquakes in both Haiti and Chile in 2010. A weaker earthquake in Haiti had a much higher social cost than a stronger one in Chile, given relative levels of preparedness and sufficient infrastructure.

Governments will need to plan adequately for the future in order to minimise future costs, although, as the World Bank and others highlight, this burden need not be as large as feared. Beyond the benefits of disaster preparedness, infrastructure development can also serve as a growth engine for the region, especially given the end of the commodities supercycle and the absence of any other significant growth drivers. Going forward, we expect the region to undertake greater efforts to expand access to basic services, and to develop master plans accounting for disasters and climate change, which should lead to better long-term resilience.