WATER AND SANITATION PROGRAM: TECHNICAL PAPER 63267 Disaster risk management in water and sanitation Economic impact of the 2007 earthquake in the water and sanitation sector in four provinces of Peru What did unpreparedness cost the country? May 2011 The Water and Sanitation Program is a multi-donor partnership administered by the World Bank to support poor people in obtaining affordable, safe, and sustainable access to water and sanitation services. Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector Economic Impact of the 2007 Earthquake in Peru in the Water and Sanitation Sector APOYO Consultoria Working Team Geoffrey Cannock, Project Director Jessica Silva Yon, Senior Economist – Project Coordinator César S. Jara Trujillo, Economist Specialist in Impact Assessments Roberto O’Connor La Rosa, Water and Sanitation Specialist – Direct Effects Analysis Fernando Saavedra Bonifaz, Junior Economist - Indirect Effects Analysis Acknowledgments: to Raúl Andrade for the revision and technical edition of the study; to Tania Begazo for her collaboration in the analysis of the secondary effects; to Carlos Aparicio, economist specialized in quantitative tools; to Gladys Anaya, for the revision of the application of methodology for the direct effects and to Magaly Ríos, Juan José Guzmán y Alexandra Herrera for the systematization of the information compiled in the quantitative and qualitative field work. Peer review from technical experts We thank the contributions made by Joaquín Toro, Senior Disaster Risk Management Specialist of the Latin America and Caribbean Regional Urban, Water and Disaster Risk Management Unit at the World Bank, and by Ricardo Zapata, Focal Point for Disaster Risk Assessment for the Economic Commission for Latin America and the Caribbean (ECLAC), Subregional Headquarters in Mexico. Water and Sanitation Program Glenn Pearce-Oroz, Regional Director for Latin America and the Caribbean Iris Marmanillo, Country Coordinator Gustavo Perochena, Project Coordinator Ángela Flores, Consultant Yehude Simon, Communications Officer Verónica Valcárcel, Consultant in Communications Pictures: Julio Kuroiwa and research team Layout: Camaleón Comunicación www.camaleon.pro First edition: May 2011 Print run: 500 copies Lima, Peru © 2011, World Bank, Water and Sanitation Program www.wsp.org wsplac@worldbank.org The findings, interpretations, and conclusions expressed in this study are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or countries they represent. 2 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector Table of contents I. Introduction ....................................................................................................................................... 4 II. The Magnitude and Effects of the August 2007 Earthquake ............................................................. 4 III. Approach to Estimate the Economic Impact of the Earthquake on the Water and Sanitation Sector ......................................................................................................................... 4 IV. Prevention Pays Off: 96% of the Direct Costs could have been Saved .............................................. 6 V. Operating Profit of Service Utilities Fell by US$ 2.34 Million ......................................................... 7 VI. The Opportunity Cost to the Urban Water and Sanitation was High .............................................. 8 VII. How was Household Wellbeing Affected? ......................................................................................... 8 VIII. What Was the Impact on Businesses? .............................................................................................. 10 IX. What Were the Main Macroeconomic Effects? ............................................................................... 10 X. Main Conclusions ............................................................................................................................ 12 www.wsp.org 3 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector I. IntroductIon In addition, the study estimated the economic effect of the Between 1996 and 2005, natural catastrophic events had earthquake on households, businesses in the area and on the an estimated cost of US$575.2 billion world-wide1. In main macroeconomic variables of the region. particular, it has been observed that developing countries are relatively more affected by such events, since its GDP have II. the MagnItude and effects of the showed sharper declines than developed countries’s ratios2. august 2007 earthquake On August 15, 2007, the country was hit by an On August 15, 2007, an earthquake measuring 7.9 on the earthquake measuring 7.9 on the Richter scale. This major Richter scale shook the southern part of the central coast of earthquake, which impacted the Ica region and provinces Peru, with devastating consequences. Given the magnitude south of Lima, disrupted the lives of roughly 431,000 of the damage caused, one wonders how much less the cost persons, leaving more than 200,000 homeless and killing of rehabilitating water and sanitation systems might have another 519. In addition, the water and sanitation been if public investment projects and management of urban systems collapsed -creating damages amounting to US$ utilities (companies in charge of the water and sanitation 27.62 million3-, 643 classrooms lay in ruins, 14 health provision), had incorporated disaster risk reduction measures. facilities were destroyed, and two bridges collapsed. For this reason, and because this is a key public sector service Consequently, a significant portion of the infrastructure for the wellbeing of population, the World Bank’s Water critical for providing basic services to the population and Sanitation Program commissioned Apoyo Consultoria could not be used. S.A.C. to conduct a research on the water and sanitation sector in order to attend the following inquiry: How much the economic Impact of the earthquake unpreparedness cost to the sector providing water and sanitation on Water and sanitation systems services? In other words, in economic terms, what would have To what extent would earthquake-related damages and been the gain to society or the reconstruction savings if risk economic losses could have been reduced had disaster- prevention measures had been included in the management of prevention measures been adopted in the urban water and services in the sector proposed for the analysis? sanitation sectors of Cañete, Chincha, Pisco, and Ica? In answer to this question, the study estimated how much was In order to answer this question, an estimate of the spent on making this very important sector operational again economic impact from the August 15, 2007 earthquake and restoring it to the levels existing prior to the earthquake: on the following urban water and sanitation utilities in other words, what were the direct effects. Using this figure, operate: EMAPICA (Ica), EMAPISCO (Pisco), it has been calculated how much would have been saved in SEMAPACH (Chincha), and EMAPA Cañete (Cañete). achieving sector recovery if appropriate work had previously This document presents some of the most important been done to maintain infrastructure and if the infrastructure findings of this study. had been constructed using earthquake-resistant materials. It has also been calculated how much revenue the enterprises III. approach to estIMate the econoMIc IMpact of the earthquake providing water and sanitation services lost after the on the Water and sanItatIon sector earthquake. In other words, what were the indirect effects, A methodology developed by the Economic Commission specifically, in the urban areas where the following service for Latin America and the Caribbean (ECLAC)4 was used providers operate: EMAPICA (Ica), EMAPISCO (Pisco), to estimate the economic impact of the damages to water SEMAPACH (Chincha) and EMAPA Cañete (Cañete). and sanitation services caused by the 2007 earthquake. It classifies the impact of a natural catastrophic event into 1 Hofman, David. “Time to Master Disaster”, Finance and Development Magazine, volume 44, number 1, March 2007. direct, indirect, and macroeconomic effects. 2 In this connection, in the World Bank discussion paper entitled “Complementing Natural Disasters Management: The Role of Social Protection”, Renos Vaki states that, after Hurricane Mitch in 1998, the GDP of Honduras was six percentage points below 3 Amounts in American dollars are based on the exchange rate US$ 1.00 = S/. 2.80 pre-disaster projections. The damage and losses caused by these phenomena over the last 30 years in some vulnerable countries in Latin America and the Caribbean have 4 ECLAC, “Guide for Social, Economic and Environment Impact Assessment in been estimated by ECLAC at over 50 billion dollars. Disasters”, Mexico, 2003. 4 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector Direct effects (damages) are those that impacted the gender and the environment) and businesses that operate water and sanitation sector infrastructure at the time of around the disaster area. the natural event and right after it happened. Measuring the direct effects using the ECLAC methodology entails In order to calculate the cost of not implementing risk calculating the cost of restoring water and sewage systems management measures on the urban water and sewage to pre-earthquake conditions. In addition, an estimate was systems prior to the earthquake in Ica, Pisco, Chincha and done of the cost of the damage under a scenario where the Cañete, the estimates corresponding to the scenarios where systems, in addition to being operational, were properly the systems were maintained (scenario 1) and where systems maintained when the natural event occurred. Lastly, the cost were constructed with earthquake-resistant materials of the damage was also estimated under a scenario where (scenario 2) were subtracted from the actual costs incurred the systems were built with earthquake-resistant materials to restore the systems to pre-earthquake operating levels and were properly maintained when the earthquake struck. (baseline scenario) (see Graph 2). The latter reflects a scenario where the water and sanitation utilities apply preventive risk management measures5. Indirect effects include (i) the loss of revenue by water and sanitation utilities from reduced billing as well as water This approach facilitated the determination of the costs losses resulting from the failure to repair direct damages incurred by urban water and sanitation utilities in Peru owing to sustained; and (ii) higher operating costs resulting from the the absence of disaster risk management practices. In addition, temporary provision of the service during the reconstruction an estimate was also done of the impact of the earthquake on period. In order to estimate both, a calculation was made on households (household water and drainage service; health; the difference between revenue, water losses, and operating costs during the post-earthquake period and the figures that would have resulted, based on historical trends, had the 5 Risk management entails the adoption of measures to reduce existing vulnerability. In this instance, it refers to the reduction of the vulnerability of the component parts earthquake not occurred. of the water and sanitation system through improvements in the quality and the maintenance of the system. GraPh 1: Location of thE rEGion assEssEd N 1 Lima Peru O E Cajatambo 2 Ica Barranca Oyon S Chincha Huaura Huaral Canta Pisco 1 Lima Huarochiri Ica Palpa Yauyos 2 Nazca Cañete Departments Others 0 40 80 160 Kilometers 0 35 70 140 Kilometers Region studied Elaboration: APOYO Consultoria www.wsp.org 5 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector GraPh 2: hoW shoULd thE cost of thE faiLUrE of WatEr and sanitation Moreover, in order to estimate the effects on businesses, UtiLitiEs to adoPt risK ManaGEMEnt MEasUrEs BE EstiMatEd? a qualitative methodology6 was used to obtain data on the economic losses incurred by businesses during the post-earthquake period7; in particular, information was Baseline Scenario - Scenario 1 or 2 = Cost of failing to apply preventive measures gathered on the damages to their water infrastructure and Hypothetical scenario on sales and investment plans. An attempt was also made to Valuation 1: Scenario 1: Scenario 2: ascertain the existence of a prevention culture in businesses. ECLAC Methodology* adequate maintenance scenario earthquake-resistant and maintenance scenario Thus, the study estimated the economic impact of the Water and Sanitation Utility Water and Sanitation Utility Water and Sanitation Utility earthquake (direct and indirect costs) on the urban water and sanitation sector in the four provinces studied. In addition, an assessment was made of the macroeconomic impact and earthquake’s effects on the main victims in the region, namely households and businesses. *Only the cost to restore the system to pre-earthquake operating levels IV. preVentIon pays off: 96% of the Elaboration: APOYO Consultoria dIrect costs could haVe been saVed The direct effects of the earthquake amounted to US$ 27.62 Direct and indirect costs can be combined for purposes of million (see Table 1). This figure reflects the direct expenditures estimating the overall scope of the economic impact caused required in the aftermath of the earthquake to restore the by the earthquake. water and sewage system to pre-earthquake operating levels. This figure is equivalent to 6.4 times the water and sanitation Furthermore, the macroeconomic effects and the effects on expenditures of the region’s provincial municipalities8 in 20079. households and businesses were considered as additional impacts on the region as a whole. taBLE 1: What Was thE totaL aMoUnt of thE daMaGE to thE WatEr and sEWaGE sYstEMs? (MiLLions of Us$) Macroeconomic effects include the extent to which the direct chincha Pisco ica cañete earthquake affected the main aggregate indicators of the effects region, namely: Potable water systems 1.77 4.30 3.79 0.88 10.75 • Gross domestic product (GDP): change in the Sewage systems 4.55 8.72 2.76 0.84 16.87 aggregate value of water and sanitation utilities. total expenditure on 6.32 13.02 6.55 1.72 27.62 emergency recovery projects • Trade balance: registry of importations and exportations during a period of time. Elaboration: APOYO Consultoria • Public finances: change in government (central and local) revenues and expenditures. • Prices and inflation: price changes fluctuations It is important to note that 47 percent of total direct effects (water and construction materials). were concentrated in Pisco. While the higher intensity of the • Employment: change in employment patterns and earthquake in Pisco would explain the fact that the damage impact on revenue. 6 Semi-structured qualitative interview with business persons. To quantify the effects of the earthquake on households, 7 The values found in this section are not statistically representative. a quantitative survey was administered to the heads of 8 The combination of activities to guarantee the supply of potable water, implement and maintain sanitary and sewage systems, and improve population sanitation households and homeowners in the region studied to conditions, and public cleanup activities. Included are activities related to planning, obtain information on their activities, the impact on their promotion, and development of sanitation service providers. (Source: the Ministry of Economy and Finance of Peru). incomes, the region’s epidemiological patterns (inhabitants’ 9 Total expenditures in 2007 by the Provincial Municipalities of Ica (US$ 1.43 vulnerability to diseases), and other possible changes linked million), Chincha (US$ 1.07 million), Pisco (US$ 1.18 million), and Cañete to the earthquake. (US$ 0.68 million) amount to US$ 4.35 million. 6 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector there was greater than it was in other cities10, its sewage The figures obtained show that risk management should system had been determined to be in critical condition prior begin with ongoing maintenance of water and sewage to the earthquake. Consequently, its system was much more systems. However, consideration should also be given to the vulnerable than those of other affected cities. use of better infrastructure materials, replacing pipes made of unsound materials (concrete) and vulnerable facilities Based on the results of the study, it is estimated that the (wells, irrigation tunnels, etc.) with facilities constructed extent of the damage to the systems would have been 5.9 with earthquake-resistant materials. times less had water and sanitation utilities conducted proper maintenance work on water and sewage systems. V. operatIng profIt of serVIce Consequently, a comparison of earthquake recovery utIlItIes fell by us$ 2.36 MIllIon costs with those that would have been incurred had the In the case of indirect effects, measured as the decline in the infrastructure system been adequately maintained points to operating profits of water and sanitation utilities, the overall a savings of US$ 22.93 million. Furthermore, in addition operating profit of the four utilities studied fell by US$ 2.36 to proper maintenance, if the infrastructure had been built million or 29 percent of the total 2007 sales of these utilities. using earthquake-resistant materials, recovery costs would have amounted to a mere US$ 1.02 million in order to It should be noted that the impact would have been much restore the infrastructure to pre-earthquake operational greater had these utilities not implemented effective levels. In other words, up to 96 percent of the costs actually commercial strategies to mitigate the impact of the incurred could have been saved (see Table 2). earthquake on their earnings. For example, SEMAPACH conducted campaigns to identify illegal connections, register its users, collect revenue, and install meters. As a result, its 10 Maximum earthquake intensity in Pisco stood at VII-VIII on the modified sales increased fairly rapidly in the post-earthquake period. Mercali scale. In Chincha, Ica, and Cañete, maximum intensity was VII. TABLE 3: coMParison of rEsULts statE to oPEratinG Profit in WatEr TABLE 2: How MucH couLd HAvE BEEn SAvEd if wATEr And SAniTATion UtiLitY EMaPisco, YEars 2007, 2008 and 2009 (thoUsand of doLLars) uTiLiTiES HAd iMpLEMEnTEd riSk MAnAgEMEnT MEASurES? (MiLLionS of uS$) 2007 2008 2009 Costs that would have been incurred with … account Effective Estimate Effective Estimate Effective Estimate Sales 927 1,078 1,217 1,121 1,263 1,197 1. Baseline Scenario: 2. Scenario 2: 3. Scenario 2: Sales’ costs 1,303 1,355 1,279 1.397 1,346 1,573 Emergency Projects Properly maintained Infrastructure built with infrastructure earthquake-resistant materials Gross utility -375 -278 -62 -276 -84 -375 and maintained properly Sales’ expenses 177 201 355 176 346 186 city damage city damage city damage Administrative Pisco 13.00 Pisco 1.29 Pisco 0.46 479 390 638 305 631 328 expenses Chincha 6.32 Chincha 0.68 Chincha 0.18 operating profit -1,032 -868 -1,055 -757 -1,060 -889 Ica 6.57 Ica 2.46 Ica 0.29 Cañete 1.71 Cañete 0.25 Cañete 0.11 Source: EEFF EMAPISCO Elaboration: APOYO Consultoria total 27.60 total 4.68 total 1.04 TABLE 4: indirEcT EffEcTS’ ESTiMATion BY wATEr uTiLiTY in EAcH provincE 5.9 times less than the 4.6 times the cost (MiLLion of doLLArS) Savings: Savings: cost of the emergency of infrastructure with US$ 22.92 millions US$ 3.64 millions projects maintenance only indirect effects chincha Pisco ica cañete total effects Operating profit -0.43 -0.68 -1.07 -0.57 -2.75 decrease It would have been 27 times less than the cost Total savings: Operating profit installed over 8,133 water of emergency projects US$ 26.56 millions 0.0 0.04 0.21 0.14 0.39 connections and sewerage increase 7,925, benefiting 160,888 inhabitants total by province -0.43 -0.64 -0.86 -0.43 -2.36 Elaboration: APOYO Consultoria Elaboration: APOYO Consultoria www.wsp.org 7 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector VI. the opportunIty cost to the urban per household or the equivalent of 4 percent of the weekly Water and sanItatIon sector Was hIgh income of an average household in the Ica department12. (us$ 30 MIllIon) Based on these calculations, the earthquake is estimated to Total additional expenditure by all households in the have resulted in total losses to water and sanitation utilities region studied, during the period taken to repair water and of Ica, Pisco, Chincha and Cañete amounting to US$ sanitation facilities (in the aftermath of the earthquake), is 30 million (direct and indirect effects). This sum could estimated at more than US$ 470 thousand. have been used to provide services to 160,888 residents in the form of more than 8,183 potable water connections TABLE 5: hoUsEhoLd additionaL EXPEnditUrE dUE to LacK of drinKinG WatEr and 7,925 sewage connections, representing 7 percent average days additional payment Province and 9 percent of potable water and sewage connections, without water (thousands of dollars) respectively, in the operating region of the water and Ica 12 141 sanitation utilities studied. Chincha 21 143 Pisco 31 137 Cañete 7 49 total 470 grApH 3: EstiMatEd EconoMic iMPact of thE EarthQUaKE Elaboration: APOYO Consultoria chincha Us$ 6.32 Pisco Us$ 13.04 direct Effects Health Care Us$ 27.64 ica Us$ 6.57 Estimated damage Although only 5 percent of the population became ill as a cañete Us$ 1.71 caused by the earthquake result of the earthquake, children were the most vulnerable uS$ 30 million (60 percent). There was no significant outbreak of chincha Us$ 0.64 Pisco Us$ 0.43 gastrointestinal illnesses resulting from the water consumed, indirect Effects Us$ 2.36 ica Us$ 0.86 the lack of waste removal or the shortage of clean water for cañete Us$ 0.43 drinking and proper hygiene. Elaboration: APOYO Consultoria GraPh 4: hoUsEhoLd EXPEnditUrE corrEsPondinG to iLLnEssEs rEsULtinG froM thE EarthQUaKE With free VII. hoW Was household WellbeIng medical service 23% affected? Spent 65% More than half the households (66 percent) in the urban regions of Pisco, Chincha, Ica, and Cañete were affected by Expenditure was of US$ 18 - US$ 21 the earthquake. The impact on households in such areas as Don’t know 12% weekly approximately household water and sewage service, health, gender, and the environment merits analysis. It was free Spent Don’t know Source: Survey to households - Ipsos APOYO Drinking water and sewage service Elaboration: APOYO Consultoria On average, 81 percent of households experienced interruptions or changes in water service over a 16-day period. It is important to note that in the regions studied, Based on the results of the survey, water trucks were the main measures were adopted to prevent the spread of diseases. alternative source of water (69 percent)11during this period, For example, the number of hours that water was supplied which resulted in a weekly cost of approximately US$ 5.36 was curtailed to avoid flooding from leaking pipes; typhoid fever, tetanus, Hepatitis A and B, and yellow fever 11 Owing to the importance of water trucks as an alternative source of water during emergencies, comprehensive plans should be developed for ongoing distribution. To this end, water and sanitation providers should monitor the arrival frequency, 12 The monthly income of an average family in Ica Department was the equivalent schedules, regions, and registration by beneficiaries. of US$ 580.71 in 2007. 8 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector vaccinations were administered; and water quality was The Graph 5 shows the impact of the earthquake on continuously monitored. domestic chores. Consideration was given to homes where women increased their domestic chores (84 percent) and Of the total number of households that had at least one those where women had to give up wage-paying work to member with an earthquake-related illness13, 65 percent perform domestic chores (16 percent). The total monetary spent between US$ 18 and US$ 21 per week. Only 23 value of the domestic work performed by women as a percent received free medical care and medication. result of the earthquake stands at US$ 13.93 million for the entire region studied (equivalent to 0.3 percent Ica’s Taking into account the estimated cost and the average time GDP in 2007). This number corresponds to US$ 193.6 per taken for individuals to recover, earthquake-related health household in cases where the earthquake increased domestic care expenditure was between US$ 6.1 million to US$ 7.5 chores. However, instead of being viewed as household million, approximately. This number is comparable to the income, this sum should be considered an expenditure entire sum spent by the central government on health care in equivalent to 3 percent of the average annual family income Ica during 2007. in the Ica region. Gender Environment In the aftermath of a natural catastrophic event that heavily The impact of a natural catastrophic event such as the 2007 impacts a population, domestic chores14 in most households earthquake on water and sanitation systems can lead to were assumed largely by women (mothers – 70 percent, sisters environmental changes that adversely affect a population’s – 2 percent, and other female members – 2 percent). In 15 health and wellbeing. percent of households, one member spent all of his or her time caring for the sick. Mothers were the main caregivers. The earthquake disrupted the functioning of the sewage 63 percent of households reported that at least one person system of 14 percent of households. As a result, a portion was assigned the task of collecting water, with women also of the population used outhouses or latrines, portable bearing primary responsibility for this task (36 percent). bathrooms, or the home of another family member. To a lesser extent, people used open land for defecation. 13 Includes respiratory, diarrheal, and skin disorders as well as contusions. 14 Domestic chores include caring for children and sick or injured family members, obtaining food rations or donations, and carrying water. GraPh 5: EstiMatEd VaLUE of incrEasEd doMEstic chorEs of WoMEn in thE rEGion stUdiEd Work done by Work done by women before women after the the earthquake earthquake Valuation assumptions Domestic 43% • US$ 1.08 per hour households Households with US$ 8.21 84% chores • 5 additional hours tended to by … greater domestic million 114,346 • 30 days of additional work chores 49,169 households Women 74% 137,767 Wage-paying 100% Moved to • US$ 1.08 per hour Urban US$ 5.71 16% 22,042 domestic chores • 8 hour work day households million households 22,042 households • 30 days of additional work 186,171 US$ 13.92 Men million 16% 48,404 Source: Survey to households - Ipsos APOYO Elaboration: APOYO Consultoria www.wsp.org 9 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector However, a comparison of the pre- and post-earthquake Lastly, it was revealed that 70 percent of businesses did situations shows a 4 percent increase in homes that used not have insurance to transfer risks from earthquakes, proper solid waste disposal methods such as trash collection nor did they have insurance to cover accidents or other by garbage trucks or payment to a third party to collect business-related. household waste. This increase resulted from the rebuilding effort and the technical assistance provided in the aftermath IX. What Were the MaIn of the earthquake. MacroeconoMIc effects? The macroeconomic effects were calculated by taking into VIII. What Was the IMpact on account the change in the main aggregate accounts of the busInesses? affected region: GDP, trade balance, public revenues, prices The earthquake had a significant impact on business activities and inflation, and employment. given that various services that support them were affected. According to businessmen surveyed in the affected region, GDP of water and sewage services business activities were most heavily impacted by power The 2007 and 2008 decline in aggregate income for outages (35 percent) and damage to and problems with water the water and sanitation sector in Ica as a result of the and sanitation services (25 percent)15. (See Graph 6) earthquake stood at roughly US$ 180,000 per year or the equivalent of 1.8 percent of the total estimated for the sector Although the impact of the earthquake was small for 80 in 2007 and 1.3 percent in 200817. percent of businesses, it was prolonged (in the case of 52 percent of businesses, sales were affected for over two months). In addition, it was noted that at least 60 percent GraPh 7: EstiMatEd GdP of WatEr and sEWaGE sErVicEs factUaL and coUntErfactUaL scEnarios of businesses in the sample with investment plans prior (MiLLions of cUrrEnt Usd) to the earthquake had to halt or postpone these plans, 14.0 a situation that continue for some time16, as a result of 12.7 12.5 12.0 earthquake damage. 10.0 9.4 9.2 GraPh 6: Worst nEGatiVE iMPact BY indUstrY 8.0 6.0 40% 35% 4.0 35% 2.0 30% 25% 0 25% 21% 2007 2008 20% Counterfactual scenario (without earthquake) Actual scenario (with earthquake) 15% 14% Source: SEMAPACH, EMAPICA, EMAPISCO, INEI and Economic Census 2008 10% 5% 2% 2% 0% Roads Telecom. Electricity Water and Banking Government Trade balance sanitation services Regarding the impact on the water and sanitation utilities’s Source: Survey to households - Ipsos APOYO exports ratio, the results are not relevant. This companies Elaboration: APOYO Consultoria do not export. For this reason, this variable did not affect the trade balance. On the other hand, regarding the imports 15 Businesses were estimated to be without these services for up to 15 days. 17 Using the ECLAC methodology (2003), only the effect of revenue losses by 16 Some of the survey respondents reported that they had in fact postponed their water and sanitation providers was considered as the impact on GDP. Impact on investment plans owing to the earthquake and that up to the time of the survey, stock (infrastructure) losses are excluded. While the loss of stock leads to reduced they still had not moved forward with these investments. The surveys were conducted production capacity of water and sanitation providers, this is reflected in the decline in in May 2010. future rather than current flows (2007). 10 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector ratio, and according to interviews with operating managers Prices and Inflation of each water utility, usually, urban utilities buy building Water price increases were linked to changes in the materials, especially pipes which represent 93% of their total wholesale price index (WPI) rather than to the effects of expenses in materials from the national industry. the earthquake. These adjustments affected 30 water and sanitation utilities in 2007 and 2008. However, owing to the Public Finances damage in infrastructure caused by the earthquake, demand The impact on public finances (i.e. the impact on the for water and sanitation construction materials rose. This revenue of the national and sub-national governments) surge in demand may have driven up the prices of such is due to three factors: (i) lower taxes collected by the construction materials such as PVC pipes, which rose by 16 government owing to the decline in production among percent between August and October 2008. water and sanitation utilities; (ii) lower revenues of public enterprises; and (iii) higher public expenditures owing to Employment the investment in reconstruction and damage repair work. The impact of the earthquake is measured both in terms of (See Table 6) the direct loss of employment and the decline in incomes owing to fewer hours worked and lower pay. taBLE 6: EffEct on PUBLic financEs, 2007-2009 Specifically, 18 percent of heads of household switched (thousands of Us$) jobs as a result of the earthquake, given that more time was Public revenue/Expenditure thousands needed to attend to family needs. Nevertheless, as observed a. Tax collection associated with the change in the production of goods and services 2,5 in Graph 8, this impact had more implications on women, b. Change in the revenue of public enterprises 0,1 as 21% of them had to change their main activity; in the case c. Investment expenditure on reconstruction works and of men this percentage represents 14%. 21,8 damage repair net Effect (a + b - c) -19,2 grApH 8: PErcEntaGE of PErsons that chanGEd thEir EMPLoYMEnt actiVitY* Source: FORSUR and SUNASS Elaboration: APOYO Consultoria 100% 90% 80% 70% Although tax collection associated with changes in the 60% 50% production of goods and the revenue of public enterprises18 40% was positive, this was offset by the major investments 30% 20% required to rehabilitate water and sanitation services. 10% Consequently, the overall net effect was negative (roughly 0% US$ 19.3 million). This figure is equivalent to 26 percent of the 2007 revenue collected in the form of sales taxes *Survey was applied to persons who gave economic support to the house (impuesto selectivo al consumidor ISC), income taxes and/or managers of the house expenses. (impuesto a la renta IR), and the selective consumption tax. Source: Survey to households – IPSOS APOYO Elaboration: APOYO Consultoria Total government sales taxes (net effect) on investments by FORSUR (the entity in charge of reconstruction) and other As part of the earthquake’s effects, it’s observed a change entities in sanitation infrastructure reconstruction stood at in the type of activities performed by the local population. approximately US$ 2.5 million. After the event, there is an increase of 6% of persons who dedicate to domestic activities. In contrast, there is 18 In 2007, the revenue of water and sanitation providers fell sharply (US$ 375 a decrease of 4% in the population dedicated to tertiary thousands). Though smaller, these losses continued in 2008 (US$ 150,000), with the sector. In the other sectors there is no relevant variation trend being reversed in 2009 as a result of improved management and investments, with the earthquake scenario generating more revenue than the non-earthquake (see Graph 9). scenario (US$ 631.8). www.wsp.org 11 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector In order to estimate the negative impact of households, grApH 9: actiVitY BEforE and aftEr thE EarthQUaKE two scenarios were considered: (i) a 30 percent impact on 45% +6% Before the earthquake monthly income (scenario 1); and (ii) a 10 percent impact 40% 38% After the earthquake on monthly income (scenario 2)20, for both the group whose income fell (46 percent) and the group whose income rose 35% Did not present relevant variations (more than 2%) 32% (5 percent). In both cases, a two-month period and monthly -4% 30% 27% income of US$ 281.4321 were used. As a result, under 25% 25% 24% scenario 1, it was estimated that, overall, household heads 20% in the studied region lost US$ 12.86 million (0.3 percent of 20% Ica’s GDP), while under scenario 2, income was projected to 15% have fallen by US$ 4.29 million. These figures represent 0.5 10% 8% 9% percent and 1.5 percent of the total annual income of urban 4% 4% 4% families in the Department of Ica, respectively. 5% 2% 2% 2% 0% X. MaIn conclusIons ife ng g n t e en * at tio in 1. Overall, the earthquake caused damages to the water or ew i sh ld ic ud ca ct nd ui us Fi St se du /B i Ho l/ and sanitation systems of the towns of Cañete, Chincha, ’t y /E ra ar on g in tu rti th /D in ul Te al M Pisco and Ica with a total amount of US$ 30 million22. ric He er th Ag O *Includes the following service activities: tourism, industry and transport. This money could have been used to install over 8,183 Source: Survey to households – IPSOS APOYO water connections and 7,925 drainage systems to benefit Elaboration: APOYO Consultoria 160,888 inhabitants. 2. Of this total, the damages or direct effects (those related to Income impact work for the recovery and return of water and sanitation Besides producing an impact in the type of activities performed systems to pre-disaster status) cost US$ 27.6 million. in the region, the earthquake had a very important impact in This is 6.5 times the 2007 budget of the provincial the income of the population: 46%19 of those surveyed said municipalities in the water and sanitation sector of the that their incomes decreased; 49% said that theirs did not studied area. vary; and only 5% said their incomes increased. In average, their incomes were impacted by a period of two months. 3. The results show that, if the urban utilities studied had performed ongoing maintenance of the water 19 This estimation includes those persons who changed activities and those who and sanitation systems, the estimated value of the continue performing the same activity after the earthquake. Students and housewives damage would have been 5.9 times less; in other words, (37% of the persons surveyed) were excluded for this estimation. approximately US$ 22.9 million would have been saved. Moreover, if the infrastructure for these services had been GraPh 10: EstiMatEd iMPact of thE EarthQUaKE on thE incoME of constructed of ductile material, if the quality of the soil in hoUsEhoLd hEads in thE rEGion stUdiEd which the systems were installed had been evaluated and Scenario 1: Scenario 2: income of heads of household Impact 30% Impact 10% if ongoing maintenance had been performed on wells and tunnels, etc., a total of US$ 26.6 million would have been Fell by 85,639 - US$ 14.29 - US$ 5 46% households million million saved on repairing the water and sanitation systems of Urban households 49% Held steady in service providers in the Sur Chico. 91,224 households 186,172 5% Increased in US$ 1.43 US$ 0.71 9,309 households million million 20 Two scenarios were considered owing to a wide range of answers present in the - US$ 12.86 - US$ 4.29 million million data. The percentages used reflect the smallest (10 percent) and biggest (30 percent) decline reported by survey participants. Source: Survey to households - Ipsos APOYO 21 Source: National Household Survey, 2007. Elaboration: APOYO Consultoria 22 Figure obtained by adding direct and indirect effects. 12 Disaster Risk Management in Water and Sanitation Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector 4. In addition, indirect effects cost US$ 2.3 million. This 6. An analysis was made of the effect of the earthquake on amount is equal to 29 percent of the service providers’ the well-being of households from the period immediately total sales in 2007. However, the result may have been after the earthquake until the beginning of the study. under-estimated because of policy changes introduced by On the basis of a survey which collected quantitative EMAPISCO and SEMAPACH23 to increase operating data from a sample representative of the influence area, revenue following the earthquake. the following thematic modules for households were evaluated: 1) water and sanitation service at home; 5. As regards macroeconomic effects, the impact of the 2) health; 3) gender; and 4) environment. earthquake was calculated in relation to the following variables: (i) GDP for drinking water and sanitation 7. In 81 percent of households, water service was in Ica; (ii) government finance; (iii) water rates and interrupted or affected for an average of 16 days. As a inflation; and (iv) possible effects on employment. result, water trucks were the principal alternative source of water (69 percent). This represented a weekly cost • The decrease in GDP for drinking water and sanitation of US$ 5 for each household which had to use this services in Ica attributable to the earthquake for 2007 alternative source. And that amount represents 4 percent and 2008 was approximately US$ 180.714 for each of the weekly earnings of an average household in the year. This represents an estimated 1.8 percent and 1.3 department of Ica. percent of GDP in Ica for 2007 and 2008 respectively. 8. Because of the earthquake, 14.3 percent of household • The impact on government finances was negative members fell sick for reasons attributable to the and was calculated in relation to three indicators: disaster, mainly the lack of waste disposal (28 percent). (i) variation in taxes collected by Central Government Children and mothers were the most vulnerable. due to variation in production of goods and services; Spending on health in these households averaged (ii) variation in the income of public enterprises; and between US$ 18 and US$ 21 a week. Depending on (iii) higher costs of investment to reconstruct works the duration of the prevalence of diseases, the spend and repair damage. The first two indicators are positive. amount of the studied area varied between US$ 6.1 However, they are offset by the amount invested to million and US$ 7.3 million. rehabilitate the water and sanitation service. Thus, there 9. The earthquake had a different effect on men and was a net negative effect of approximately US$ 19.3 women, affecting the latter more. This was because of the million. This is equivalent to 26 percent of the amount of time that women had to devote to domestic amount collected by the Superintendencia Nacional de chores24 and also because they had to give up paid work Administración Tributaria (Peruvian Tax Administration in order to perform those chores. The main earthquake- Office – SUNAT) in Ica in 2007 in the form of general related domestic functions were looking after sick sales tax, income tax and selective excise tax. relatives and fetching water. For example, in 36 percent • Water rates have increased but this was due to of households, mothers were responsible for collecting adjustments in the wholesale price index and not to water; and at least half of them devoted between one and the effects of the earthquake. three hours a day to this activity. In general, the increase • As far as employment is concerned, 18 percent of in domestic work was approximately five hours a day for heads of household changed their principal activity: 30 days. This type of work was valued at US$ 8 million for the shift was mainly towards homemaking activities. In the area studied. In addition, in 16 percent of households, addition, it is estimated that heads of household in the women had to quit their regular jobs to perform this type region studied lost a total of between US$ 4 and US$ 13 of work; the total losses were US$ 5.7 million. million (0.2 percent of the GDP of Ica in 2007). 10. Regarding, the effect on the environment, 10 percent of the population had to relieve themselves outside, 23 In this case, the results appeared to be so skewed that it was decided not to consider any figure subsequent to November 2008. This means that more than one instead of in the appropriate place (hygienic amenities). year was omitted from the calculation of indirect effects, in comparison with the other service providers. 24 According to the study, this term refers to unpaid work related to domestic activities. www.wsp.org 13 Economic Impact of the 2007 Earthquake in Peru in the water and sanitation sector Regarding, solid waste, it was found that 40 percent 12. With regard to sanitation infrastructure and operating of households changed their garbage disposal indicators from the service providers themselves, the arrangements. However, use of appropriate methods25 of systematization of information for better disaster risk garbage disposal increased by 4 percent because of post- management still seems rudimentary and disorganized. earthquake reconstruction work and technical assistance. This made the analysis more complicated. For example, much of the service providers’ data are not in digital 11. The commercial strategies used by the service providers format and are kept in places where they may be to offset the impact of the earthquake on their revenue damaged or lost. This was the case for EMAPISCO: were effective. In some cases, sales volume actually because of the earthquake and the collapse of its offices, increased. This was due to the firm’s efforts to generate data prior to 2001 were lost. income not previously earned, using the following 13. The study shows that disaster risk management is not mechanisms: detection of clandestine connections; commonly practiced by service providers in the sector. recounting of users; upgrading of damaged In other words, before the earthquake, information infrastructure; aggressive policy to recover inactive on former natural catastrophic events, soil quality or clients; collection and installation of micro-meters. In exposure of systems, have not been used in order to have several instances, revenue was recovered quite rapidly accurate measures that could have been use to reduce and reached pre-disaster levels. the vulnerability of the components of the water and sanitation system. The service providers do not know their risk and therefore to not undertake or plan the necessary projects to reduce or mitigate it. They do not have or do not use emergency plans and were not 25 As indicated, suitable methods are leaving garbage to be collected by the garbage truck or paying for it to be collected. responsive at the time of the earthquake. 14 Disaster Risk Management in Water and Sanitation