Water privatization in Chile
Encyclopedia
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 that privatized its entire urban water supply and sanitation sector. It also carried out the most far-reaching reform in Latin America—transferring ownership of assets to the private sector—while in other Latin American countries, this involved the private sector governments' signing concession agreements while maintaining ownership of assets in public hands. The privatization was preceded by a decade of reforms, during which a robust regulatory framework was created, public utilities were strengthened, tariffs were increased, and a system of subsidies for needy households was introduced to help them cope with higher tariffs. These reforms may be a crucial element in explaining the relative success and 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$4-billion of commitments made in 1999 alone through four projects. Seven projects were divestitures, ten were concessions, and three were greenfield projects in wastewater treatment plants.
Therefore, in December 1988, the General Water and Sanitation Law () allowed the granting of 13 regional concession
s to public, private, or mixed shareholding companies in each of Chile’s regions. In 1990, the regulatory agency SISS () was created through a separate law. An innovative model of tariff regulation was borrowed from the Chilean electricity and telecommunications sector; efficient cost levels were estimated for an imaginary model company and used as a benchmark to set tariffs for the utilities. Means-tested subsidies (i.e., subsidies that are granted only to those that have demonstrably limited means) were also introduced at the same time to cushion the effect of the tariff increase on the poor. The legal framework, with some modifications, is still in force today.
Initially, the regional companies remained public, but the intent was to prepare them for privatization. During that period, they achieved financial self-sufficiency, were granted tariff increases, improved their efficiency, and increased coverage. The regional companies were also transformed into private law companies (). Investments increased from less than US$ 80m annually on average during the 1980s to US$ 260m in 1998. 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.
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. 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 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.
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.
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
of water in Chile
Water supply and sanitation in Chile
Water supply and sanitation in Chile is characterized by high levels of access and good service quality. Compared to most other countries, Chile's water and sanitation sector distinguishes itself by the fact that all urban water companies are privately owned or operated...
was undertaken from 1998 to 2005 under the democratically elected governments of Eduardo Frei
Eduardo Frei
Eduardo Frei may refer to either of two presidents of Chile:*Eduardo Frei Montalva , Chilean political figure and president of Chile from 1964 to 1970...
and Ricardo Lagos
Ricardo Lagos
Ricardo Froilán Lagos Escobar is a lawyer, economist and social democrat politician, who served as president of Chile from 2000 to 2006. He won the 1999-2000 presidential election by a narrow margin in a runoff over Independent Democrat Union candidate Joaquín Lavín...
. Chile is the only country in Latin America that privatized its entire urban water supply and sanitation sector. It also carried out the most far-reaching reform in Latin America—transferring ownership of assets to the private sector—while in other Latin American countries, this involved the private sector governments' signing concession agreements while maintaining ownership of assets in public hands. The privatization was preceded by a decade of reforms, during which a robust regulatory framework was created, public utilities were strengthened, tariffs were increased, and a system of subsidies for needy households was introduced to help them cope with higher tariffs. These reforms may be a crucial element in explaining the relative success and stability of water privatization in Chile compared to other countries such as Argentina
Water privatization in Argentina
The privatization of water and sanitation services in Argentina between 1991 and 1999 under the government of Carlos Menem was part of one of the worlds largest privatization programs. Water and sanitation concessions with the private sector were signed in 28% of the country's municipalities...
and Bolivia
Water privatization in Bolivia
The privatization of water supply and sanitation in Bolivia took place during the second mandate of Bolivian President Hugo Banzer in the form of two major private concessions: One in La Paz/El Alto to Aguas de Illimani S.A...
.
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.
A decade of reforms prior to privatization
Between 1988 and 1990, a number of legal reforms and the creation of new institutions had two principal objectives:- The service providers should become self-financing through higher tariffs that represent the real costs of the services and more efficient performance;
- Water supply and sanitation coverage and quality should become universal.
Therefore, in December 1988, the General Water and Sanitation Law () allowed the granting of 13 regional concession
Concession (contract)
A concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
s to public, private, or mixed shareholding companies in each of Chile’s regions. In 1990, the regulatory agency SISS () was created through a separate law. An innovative model of tariff regulation was borrowed from the Chilean electricity and telecommunications sector; efficient cost levels were estimated for an imaginary model company and used as a benchmark to set tariffs for the utilities. 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 to prepare them for privatization. During that period, they achieved financial self-sufficiency, were granted tariff increases, improved their efficiency, and increased coverage. The regional companies were also transformed into private law companies (). Investments increased from less than US$ 80m annually on average during the 1980s to US$ 260m in 1998. However, regional utilities still did not have sufficient resources to expand wastewater treatment.
Under the government of Christian Democrat President Eduardo Frei
Eduardo Frei Ruiz-Tagle
Eduardo Alfredo Juan Bernardo Frei Ruiz-Tagle is a Chilean politician and civil engineer who was President of Chile from 1994 to 2000. He is currently Senator for Los Ríos and was President of the Senate from 2006 to 2008. He attempted a comeback as the candidate of the ruling Concertación...
, 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
Santiago, Chile
Santiago , also known as Santiago de Chile, is the capital and largest city of Chile, and the center of its largest conurbation . It is located in the country's central valley, at an elevation of above mean sea level...
and Valparaíso
Valparaíso
Valparaíso is a city and commune of Chile, center of its third largest conurbation and one of the country's most important seaports and an increasing cultural center in the Southwest Pacific hemisphere. The city is the capital of the Valparaíso Province and the Valparaíso Region...
, were privatized. Staffing was further reduced, new complaints management procedures were introduced, and the share of collected wastewater treated increased significantly.
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. 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
Coalition of Parties for Democracy
The Concert of Parties for Democracy , more often known as the Concertación, is a coalition of center-left political parties in Chile, founded in 1988...
.
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."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
Concession (contract)
A concession is a business operated under a contract or license associated with a degree of exclusivity in business within a certain geographical area. For example, sports arenas or public parks may have concession stands. Many department stores contain numerous concessions operated by other...
, 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.
The Socialist Presidents Ricardo Lagos
Ricardo Lagos
Ricardo Froilán Lagos Escobar is a lawyer, economist and social democrat politician, who served as president of Chile from 2000 to 2006. He won the 1999-2000 presidential election by a narrow margin in a runoff over Independent Democrat Union candidate Joaquín Lavín...
(2000–06) and Michelle Bachelet
Michelle Bachelet
Verónica Michelle Bachelet Jeria is a Social Democrat politician who was President of Chile from 11 March 2006 to 11 March 2010. She was the first woman president of her country...
(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.