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As President Piñera arrived in Valparaiso on March 11 to accept the presidential sash from Michelle Bachelet, presidents and foreign dignitaries gathered for the occasion looked afraid. As well they might since Chile’s biggest political shake-up in two decades was accompanied by several strong aftershocks that rattled Chileans already on edge since the February 27 earthquake that killed over 400, destroyed 200,000 homes and caused billions of dollars in damage to infrastructure.

Despite a tsunami warning that forced onlookers to flee to the hills, the inauguration ceremony went ahead on schedule and President Piñera became Chile’s 48th president. But he didn’t have long to bask in the glory or even have lunch with his guests. His first day on the job included a helicopter tour of some of the worst-hit areas and a speech to the nation about the challenges ahead.

And the challenges are many. Much of Chile’s second city – Concepción – lies in ruins and rebuilding shattered infrastructure including schools, hospitals and highways will be costly and time-consuming.

“Nature has delivered us a blow, but Chile is a country that knows how to face adversity… we will rebuild together, stone by stone, brick by brick. And we won’t just rebuild, we will rebuild better,” said Piñera in his inaugural address.

It’s not exactly what Piñera had in mind after his election in mid-January but the timing of the earthquake – at the end of the Bachelet government just 12 days before the handover – was at least propitious.

Piñera dodged criticism of the previous government’s immediate response, including its delay in sending troops into Concepción, and he will have a longer political honeymoon than he would have enjoyed without the earthquake.

“Piñera has an excellent alibi, if nothing works he can blame the earthquake,” said Patricio Navia, a Master Teacher in Liberal Studies at New York University.

Reconstruction also plays to Piñera’s strengths gained from decades as a manager of companies like LAN airlines, including an emphasis on efficiency, productivity and limited tolerance for bureaucracy.

“The earthquake has cornered Piñera… but if he’s going to be cornered he’d prefer the corner of efficiency and productivity, which is the one he knows best,” said Navia.

And Piñera has come out swinging, announcing a special subsidy of 40,000 pesos (about US$80) per child for low-income families and promising to create 60,000 new jobs in the worst-hit areas.

Employment and social inclusion were two of the pillars of Piñera’s pre-earthquake program – the third was productivity - but reconstruction and how to pay for it without undermining core macroeconomic values is the new government’s immediate focus.

Paying for Repairs

The government has estimated the total price tag of the disaster at US$30 billion including US$20.9 billion worth of damage to infrastructure, split roughly equally between the public and private sectors (see Counting the Quake’s Cost in this issue).

New Finance Minister, Felipe Larraín, has said the state’s share not covered by insurance – around US$9.4 billion - will be financed by reorganizing the budget, private donations, issuing national and foreign debt, awarding infrastructure concessions, selling off some state assets and possibly raising taxes, among other measures.

Piñera’s government has created a reconstruction fund and drafted a new Donations Law that will allow private companies to donate money to specific projects.

Chile clearly has plenty of financing options, but it must be selective.

“We are studying a mixed financing formula but we have to do this very carefully because we don’t want changes in the exchange rate or interest rate to cause problems in sectors already devastated by the earthquake,” said Rodrigo Álvarez, Undersecretary of Finance.

Since the earthquake, Chile has received a flood of financing offers from international institutions like the Inter-American Development Bank. “The problem here is not a lack of resources, and we are grateful for these offers, but we have to strike a delicate balance,” said Álvarez.

A flood of dollars from foreign institutions or Chile’s Economic and Social Stabilization Fund would weaken the dollar and boost inflation, just as exporters are beginning to recover from the recent economic crisis.

But Álvarez admits public spending will increase in the short-term and, as the scale of the disaster becomes clearer, Piñera will face pressure from the opposition and factions within his own government to increase fiscal spending.

Larraín, a friend of Piñera´s, has vowed to maintain fiscal discipline following in the footsteps of his popular predecessor, Andrés Velasco, but Navia predicts he will come under pressure from members of the Independent Democratic Union (UDI) conservative party to increase spending.

On the positive side, Piñera had spoken of forming a government of “national unity” in January but the earthquake has unified the government in a way even he could not have foreseen.

“The Concertación has called a truce in the interests of national unity which is positive for Piñera, but he may have problems on the side of fiscal discipline because he needs higher approval ratings,” said Navia.

Piñera is not the first Chilean president to take office after a major political upheaval with the support of a unified government behind him.

The first Concertación government led by Patricio Aylwin, who governed Chile from 1990-1994 after Pinochet stepped aside, increased public spending on infrastructure which resulted in higher inflation but also higher employment, economic growth, and productivity.

“Piñera will probably take a similar approach to Aylwin, which will mean higher inflation this year but also more growth,” said Navia.

Analysts agree that economic growth will slow in the next few months due to lower consumer demand, but growth should rebound strongly in the second half of the year as employment picks up.

Estimates of the quake’s impact vary, but the Central Bank has downgraded its 2010 growth forecast to between 4.25% and 5.25%, with annual inflation expected to rise to 3%.

Despite the negative impact of the quake, Piñera still aims to achieve average annual GDP growth of 6% during his four-year term. The challenge, however, will be to increase productivity amid higher public spending.

Boosting Productivity

Despite Chile’s steady economic growth in the last two decades, productivity has declined dramatically from a peak of around 3% annual growth in the early 1990s to an average 0.5% annual decline during the Bachelet administration in 2006-2010.

“Chile has been losing economic leadership in the last 20 years because of a decline in productivity,” said Ricardo Matte, Director of the Economic Program at Santiago think-tank Libertad y Desarollo, which provided several of Piñera’s cabinet ministers.

Despite increased spending by successive Concertación governments in areas like health and education, funded by income from copper exports, productivity has not improved.

“If you invest more resources and don’t get results, this is an issue of productivity,” said Matte.

Piñera aims to change that. One of his key campaign pledges was to lift annual productivity growth to 1.5% by 2014.

On the plus side, the political unity that has emerged in the aftermath of the earthquake is an opportunity to fast-track legislation to boost productivity and improve efficiency, said Matte.

“This is an opportunity to increase productivity and innovation,” said Matte.

For example, the government could support the formation of technology clusters and clusters of small wineries in areas like the Colchagua valley near Santiago as well as encouraging partnerships with local universities.

“Innovation is like a snow ball, it just needs a little push,” Matte said.

But higher public spending is not conducive to improved efficiency. “It’s more difficult to improve efficiency when you increase fiscal spending, you can’t do both at once,” said Navia.

Piñera may be cornered, as Navia says, but he has time on his side. And there are different ways to rebuild. Rebuilding slower, but with higher standards, could have a positive impact on long-term productivity growth.

Jobs and Houses

Chile’s shipyards, pulp and paper mills and wineries concentrated in the Maule and Bío-Bío regions near the quake’s epicenter have been devastated and many will not start back up for months if not years.

Thousands have lost their jobs as a result and some companies have taken advantage of a clause in the labor law allowing them to claim force majeure as a reason to fire workers without paying severance.

“We will ensure labor regulations are not misused in these cases and we will also create new jobs by offering incentives for hiring and job training,” said Álvarez.

Employment is expected to pick up as these incentives kick in and Piñera aims to create 200,000 new jobs a year over the next four years, but a more immediate challenge is putting roofs over the heads of those made homeless by the quake.

The government’s housing plan, A United Chile Rebuilds Better, is divided into two stages. The first, providing emergency houses and tents to thousands of Chileans before the Southern Hemisphere winter arrives, is in full swing.

But the tents leak and at least one municipality in the hard-hit province of Arauco has rejected temporary shelters known as mediaguas, which are basic prefabricated structures with no kitchen or bathroom.

“There is the perception mediaguas are not very good… people would much rather wait and have a permanent solution than a temporary one,” said Navia.

Piñera may pay a political price this winter if people are still homeless when the rain falls, but waiting for more permanent housing solutions will benefit the country in the long-term, said Navia.

The second stage of Piñera’s program aims to do exactly that. “We will not just rebuild what has fallen down, but rebuild it better with new technologies and designs that are more people friendly, greener and more energy efficient,” said Piñera.

Of course, this costs money and the government has announced investment of US$2.5 billion to rebuild 134,000 houses and provide subsidies to repair another 62,000 over the next two years.

“The government can’t just start throwing money around… in the end we will all benefit if the reconstruction is done properly, but this takes time,” said Matte.

And it’s not just houses that need to be rebuilt – hundreds of roads, bridges, ports, hospitals and schools lie in ruins in the Maule and Bio Bío regions.

Although Chile’s construction standards are high, as shown by the limited damage in Santiago, they can be improved. “The earthquake is an opportunity to improve the quality of Chile’s infrastructure,” said Matte.

The government plans to tender some of the work in the form of build-operate-transfer concessions, which will allow Chile to attract foreign companies with the latest technology, materials and expertise.

“Chile should strengthen the concessions scheme since it reduces the financial burden on the government,” said Navia.

But strengthening the firewall between business and politics is key to ensuring fair competition. Although Piñera sold his shares in LAN Airlines in March, he broke a campaign promise by not doing so before taking office and he still owns the television channel Chilevisión and football club Colo Colo.

Piñera’s personal business interests may not be directly related to the reconstruction but public tenders would ensure new contracts are awarded fairly. “Piñera has to show he is more pro-market than pro-business,” said Navia.

Opportunities in the Ruins

As Chile starts rebuilding, there are plenty of opportunities for U.S. and Chilean companies to come up with innovative solutions.

“Chile needs creative solutions and companies to help in the rebuilding process with technology like pre-fabricated homes,” said Susan Segal, President and CEO of the Americas Society and Council of the Americas in New York.

For example, Canadian-Chilean firm Tecno Fast Atco, which provides modular solutions to the mining industry, donated a school to the coastal village of Iloca that was hit by the tsunami and plans to build more schools in the affected areas.

U.S. companies could also bring their experience and larger economies of scale to help small Chilean firms find solutions in niche areas, said Segal.

“There is an important opportunity for U.S. and Chilean companies to work together rebuilding the country and implementing new processes and technology,” Segal said.

Chile has nothing to prove – it’s the only South American country to be invited to join the Organisation for Economic Cooperation and Development (OECD) -but reconstruction is an opportunity to enhance productivity and build a more competitive country, said Segal.

Despite a shaky start, Piñera says he is up to the challenge. He has four years but there is much work to do that will require the combined efforts of the public and private sectors.

It’s too early to judge the new government’s performance but Segal is optimistic that Chile, as it has in the past, will dust itself off quickly.

“Chile is a very resilient country and I have no doubt it will emerge stronger as a result of this.”

Julian Dowling, Editor of bUSiness CHILE