Water privatization in Chile

The privatization of water in Chile was undertaken from 1998 to 2005 under the democratically elected governments of Eduardo Frei and Ricardo Lagos. Chile is the only country in Latin America to privatize its entire urban water supply and sanitation sector. Chile experienced the most extensive restructuring in Latin America—transferring state ownership of assets to the private sector. In other Latin American countries, concession agreements for the provision of services, with the state retaining infrastructure, are more common. The privatization was preceded by a decade of restructuring, during which a regulatory framework was created, public utilities were transformed, tariffs were increased, and a system of subsidies for needy households was introduced due to the increase in costs to consumers. These reforms may explain the relative stability of water privatization in Chile compared to other countries such as Argentina and Bolivia.

According to the World Bank's Private Participation in Infrastructure database, investment commitments by the private sector in Chile's water and sanitation sector reached US$5.7-billion in 1993–2005 through 20 projects, with US$4-billion of commitments made in 1999 alone through four projects. Seven projects were divestitures, ten were concessions, and three were greenfield projects in wastewater treatment plants.^[1]

A decade of reforms prior to privatization

The first changes to state policy on water began in the late 1980s during the end of the military government of Chile with legal reforms and the creation of new institutions. These changes had two principal objectives:

1. service providers should be self-financing through higher tariffs that represent the real costs of the services and more efficient performance;
2. water supply and sanitation coverage and quality should become universal.

In December 1988, the General Water and Sanitation Law (Ley General de Servicios Sanitarios) granted 13 regional concession contracts to public, private, or mixed shareholding companies in each of Chile’s regions. In 1990, the regulatory agency SISS (Superintendencia de Servicios Sanitarios) was created through a separate law. A model of tariff regulation was borrowed from the Chilean electricity and telecommunications sector; cost levels were estimated for an imaginary model company and used as a benchmark to set tariffs for the utilities.^[2] Means-tested subsidies (i.e., subsidies that are granted only to those that have demonstrably limited means) were also introduced at the same time to cushion the effect of the tariff increase on the poor. The legal framework, with some modifications, is still in force today.

Initially, the regional companies remained public, but the intent was for privatization. During that period, they achieved financial self-sufficiency, were granted tariff increases, improved their efficiency, and increased coverage.^[3] The regional companies were also transformed into private law companies (Sociedades Anónimas). Investments increased from less than US$80m annually on average during the 1980s^[4] to US$260m in 1998.^[3] However, regional utilities still did not have sufficient resources to expand wastewater treatment.

Under the government of Christian Democrat President Eduardo Frei, the law was amended in 1998 to promote private sector participation. The stated motive was to increase efficiency, improve service quality, and mobilize capital to extend wastewater treatment. Subsequently, all regional branches of SENDOS, as well as the water and sanitation companies of Santiago and Valparaíso, were privatized. Staffing was further reduced, new complaints management procedures were introduced, and the share of collected wastewater treated increased significantly.^[5]

Contrary to the case of many other Latin American cities, where the private sector was asked to provide services, the Chilean service providers were financially self-sufficient when the private sector took responsibility for them. The public companies had been prepared to gradually improve efficiency and profitability since the legal reforms of 1988–90. This may explain the stable process of private sector participation compared to other Latin American cases.^[6] A factor that explains the continuity of sector policies during various administrations is the fact that all presidents since Chile's return to democracy in 1990 belonged to the same Coalition of Parties for Democracy.

The privatization

The privatization was carried out in stages, beginning with the five largest of the 13 regional water companies serving more than 75% of users. Because of the staging, it is possible to compare the performance of the privatized and public utilities at that time. This comparison shows that from 1998 to 2001, private companies invested substantially more than public companies and—unlike the public companies—increased their labor productivity significantly. Tariffs increased for both types of companies, but more so for the privatized ones. However, according to one study, "...in Chile, a social consensus emerged that has made the higher water rates acceptable given the improvements in service quality and the addition of new services such as wastewater treatment."^[7]

The participation of the private sector occurred in two different ways. From 1998 to 2001—when the biggest companies were privatized—the majority of their shares were sold to the private actors. Since 2001, the government decided not to continue to sell parts of the companies but to transfer the operation rights of the companies to private actors for 30 years. This latter way of private sector participation, which is also known as concession, differs substantially from selling shares of the companies in that (i) the period of participation is limited to 30 years, and (ii) the infrastructure remains property of the Chilean state. All seven companies that were privatized in the second way merged in 2005, assuming the name ESSAN.^[8]

The Socialist Presidents Ricardo Lagos (2000–06) and Michelle Bachelet (since 2006) maintained the basic institutional structure of the sector established under previous governments based on private service provision; means-targeted subsidies; and regulation by a public, autonomous regulator.

See also

• Water supply and sanitation in Chile

References