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Nearly two months after Chile was hit by one of the biggest earthquakes in its history, the extent of the damage is becoming clearer, but even now there are widely diverging estimates of how much the reconstruction process will cost.

Some have put the figure as high as US$50 billion, others as low as US$ 8 billion. In March, Finance Minister Felipe Larraín estimated the total cost to the country at US$ 30 billion, or around 17% of GDP. This includes US$ 20.9 billion in damaged infrastructure, with the losses split more or less equally between the public and private sectors. The remainder includes a negative impact of US$ 7.6 billion on GDP growth over the next four years.

Industry, fishing and tourism bore the brunt of the infrastructure damage, accounting for a quarter of the total cost, while housing accounted for 19%, education 14% and health 13%. Insurance should cover some of the cost, but it’s not clear how much.

While some economists have upgraded their 2010 growth forecasts for Chile, arguing that the country will benefit from a construction boom, others have downgraded their figures, noting the country’s productive capacity has been badly hit.

Days after the disaster, U.S. investment bank J.P. Morgan hiked its 2010 forecast for Chile from 5.0% to 5.5% in anticipation of a rebuilding bonanza.

But that appears to be wishful thinking and the consensus is that growth will be hit this year before rebounding in 2011. The Central Bank has downgraded its projection for 2010 growth to between 4.25% and 5.25%, and economists polled by bank have, on average, downgraded their growth forecast to 4.5% from 4.9%.

Broken Bottles, Leaky Boats

The economies of the two worst affected regions, Maule and Bío Bío, which together account for 14% of GDP, took a real battering from the earthquake and the ensuing tsunami.

One of Piñera’s first actions as president was to appoint governors of the five most affected regions to oversee the reconstruction.

“The costs vary a great deal, depending on which sectors we’re talking about, and they’re still difficult to assess,” said Rodrigo Galilea, the newly appointed head of Maule’s regional government.

The worst hit sectors were forestry, wine and fishing, but other industries suffered damage too. Steel production was dented by damage to the Huachipato plant near Concepción, and Chile’s capacity to refine oil has been reduced due to damage at the Bío Bío refinery.

In the forestry sector, industry leader Arauco took a severe blow, particularly at its five wood pulp operations, which were all brought to a standstill. One of those plants, near Valdivia, has now reopened, but the Constitución plant, which produces 11% of the company’s wood pulp, was very badly damaged – not by the earthquake but by the tsunami that pounded the town afterwards – and it will be out of action for months.

Further north, the earthquake smashed millions of bottles and tipped over storage tanks in the vineyards of the Maule and O’Higgins regions. The industry association Wines of Chile estimates that 125 million liters of wine, or 12.5% of annual production, was lost. The disaster struck just as vineyards were preparing to celebrate the new harvest and many festivals have been scrapped.
 
For the fishing industry, the good news is that Chile’s industrial fleet escaped virtually unscathed. Most of the country’s large fishing boats were south of Valdivia when the quake struck - far enough away from the epicenter to avoid serious damage.

But the artisanal fishing industry along the coast of the Maule and Bio Bio regions was devastated. Industry body Sonapesca estimates that, in the Bío Bío alone, half the industry’s production capacity was damaged.

Banks Step Up

The role of Chile’s big banks, which survived the economic crisis relatively well compared to other countries, has been crucial in helping not only survivors of the quake who lost their homes and their livelihoods, but also companies in the worst hit areas.

Chile’s major banks including Santander, Banco de Chile, Banco de Crédito e Inversiones (Bci) and Scotiabank, announced special measures like allowing their Maule and Bío Bío clients to postpone mortgage and loan payments. Clients in these regions also received a discount – 20% in most cases – on credit card purchases in local pharmacies, hardware stores and gas stations.

Arturo Tagle, head of institutional relations at Banco de Chile, declined to say how much these measures have cost, but the number of clients who have taken advantage of the bank’s offer to postpone loan payments for up to three months has been “very high,” he said.

Even with these welcome measures, however, the extent of the damage is such that companies have been reassessing their investment plans. The Corporación de Bienes de Capital (CBC), a Santiago-based institute that monitors private investment in Chile, said many projects in the construction and forestry sectors will be postponed, although not necessarily scrapped.

“We’re expecting delays of between one and three months in many projects, mostly due to a loss of logistical capacity,” said Orlando Castillo, the CBC’s general manager.

Transport is a major logistical problem since the main north-south highway linking Santiago to Concepcion – the Ruta 5 Sur - has been cut in several places, which has prevented construction companies from bringing in heavy machinery.

“The earthquake is not going to halt investment, but it is going to alter the timeframe for it,” said Castillo.

Who will pay?

Chile is not a poor country like Haiti, which is also struggling to rebuild after a recent earthquake, and it has plenty of options to pay for the reconstruction, but the new government has to decide where the funds will come from.

Piñera has indicated three main sources of financing: firstly, he will reorder his spending priorities, freeing up US$700 million from non-essential projects to deal with the impact of the quake; secondly, he will dip into the state’s Economic and Social Stabilization Fund (FEES), which is still plush with nearly US$12 billion of copper dollars; and, thirdly, he will seek credit on international capital markets.

The government has said it is studying other financing sources too. It is considering, for example, raising the royalties on Chile’s big mining companies or selling some state holdings.

But the most efficient option, without increasing public spending, is to tender much of the reconstruction work to private companies. The quake represents a huge opportunity for construction companies that are itching to get to work.

They may have to be patient though. The current system for tendering contracts is far too slow to deal with such a vast and immediate challenge, said Herman Chadwick, president of the Chilean association of public works concessions companies, COPSA.
 
“The process is eternal, it can often take 12 to 18 months and we can’t afford to wait that long,” said Chadwick.

The government should create a fast-track system specifically to deal with earthquake damage that could award contracts within 90 days, he said.

“Concessionaires could handle the rebuilding of all the public roads, bridges, hospitals, schools, and prisons as well as a new road running down the coast,” said Chadwick.

Local Solutions

In contrast to the United States, Chile is highly centralized which means most of the reconstruction work will be planned, and tendered, in Santiago. But local knowledge is essential to rebuild housing and infrastructure better than before.

For example, new buildings in coastal towns should be built on higher ground, safe from the threat of tsunamis. But for that to happen, Chile must devolve more power to the regions, said Miguel Flores, Undersecretary for Regional Development in the new government.

“We need to rebuild from the regions, not from Santiago… The regional governors, mayors and local councilors should be the ones guiding us so they can take decisions in the best interests of their communities,” said Flores.

The small town of Tirúa near the coast in the Bío Bío region was wiped out by the tsunami but rebuilding the town in the same place is not an option, he said.

“Looking at the problem from Santiago one might be tempted to rebuild in the same place, but the locals will tell you they want to be away from the river and we have to listen to them,” said Flores.

As with all hard lessons, however, some good might come from it. The reconstruction effort offers the chance not just to replace buildings, roads and bridges, but to improve them. If Chile can seize this opportunity it could emerge from this disaster as a better, safer place in which to live.

Gideon Long is a freelance journalist based in Santiago. He also works for the BBC.