Mara de la Luz Domper

1
The privatization of Water and Sewage Companies
in Chile

• María de la Luz Domper
• Libertad y Desarrollo, Chile
• Sestri Levante, October, 2006

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• The adoption of the convention of respecting
  individual property and the determination of
  prices on a competitive market were the only ways
  in which man could become able to exploit
  discoverable resources so intensely as to raise
  his increasing numbers seems to me
  incontestable. . . . Von Hayek, Friedrich A. 

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Chile A case of sustainable development
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Top 15 in Economic Liberty
Source Economic and Liberty Index, The Heritage
Foundation,2005.
5
More growth and development due to liberty
7,6
5,3
3,1
Fuente Libertad y Desarrollo.
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More growth and development due to liberty
Economic Liberty Index and Growth Economic Rate
6,00
Chile
Costa Rica
5,00
Panamá
El Salvador
Perú
4,00
Bolivia
México
(1990-2003)
Growth economic rate
3,00
Brasil
Argentina
2,00
Colombia
Ecuador
Uruguay
Paraguay
1,00
Venezuela
0,00
1,00
2,00
3,00
4,00
5,00
Economic Liberty Index
Fuente The Heritage Foundation
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CHILE Economic Profile 2005

• GDP US 113 billions
• Population 16 millions
• GDP per-capita US 6.872
• External debt US 44,5 billions, 40,1 of GDP
• Internationals reserves US 16,8 billions

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Chilean economic evolution main characteristics
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Chiles economic conditions before the reforms
A closed and highly intervened economy
Source Libertad y Desarrollo.
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Chile towards a free society The Reforms
Implemented
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The economic strategy

• The market as the main mechanism to allocate
  resources
• The Chilean economy opened to the international
  competition
• Concern for macroeconomic balances as a
  requirement for sustained growth
• Subsidiary role of the government

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The main instruments

• Tariff reduction.
• A free price system.
• Privatization of state owned-companies.
• Tax policy to encourage private savings and
• investment.
• Private solutions
• Social security
• Education
• Health
• Infrastructure
• Focus on extreme poverty sector.

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Main Results

• High Rate of Growth
• Diversification of Exports
• Reduction in Poverty
• Better Health
• Higher Coverage in Education
• Less Contamination

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Real GDP Growth(Annual of change)
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Inflation Rate ( December to December)
16
Unemployment Rate Gran Santiago(Quarterly
average, Oct- Dec)
17
Foreign investment(US millions accumulated)
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Taxes on Trade
100
90
80
70
60
50
40
30
20
10
0
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The last microeconomic reform...Privatization of
Water and Sewage Companies in Chile
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• Is it possible and socially desirable to grant
  private property of natural resources such as
  water, so essential for human life and for the
  development of productive activities?
• The privatization of Water and Sewage companies
  in Chile as well as the creation of private
  tradable water rights are an example of the
  important role of private property in the
  development of a society.

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Privatization of Water and Sewage Companies

• The legal framework that rules the operation of
  water and sewage companies in Chile dates from
  1988.
• This legislation has set a new and modern legal
  rate and an institutional framework that has
  influenced the development of the sector.
• It did not consider the companies privatization.
  These companies were mainly public until the year
  2000.

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Privatization of the Sanitary Sector

• The privatization process of this sector began in
  1998.
• The main goal of the privatization process was
  the modernization of the sector.
• Problems like operational and management
  inefficiencies, service quality, and lack of
  resources to treat served water were common in
  the past.

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Main Problems of the Sector before its
privatization

• Investment deficit there was a need of resources
  of 2.400 million dollars for the period (1995 and
  2000), US250 million per year.
• 63 of which, should be allocated to treatment
  and disposition of waste water process.
• In those years (1993,1994) the state sanitary
  companies only invested US150 millions per year.

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Coverage of the Chilean Sanitary Sector 1993
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How was the privatization process handled ?

• Two different strategies were implemented.
• The first one, during President Freis
  administration, considered the privatization of
  some companies.
• The second one, handled during President Lagoss
  administration, considered the concession of the
  water companies to the private sector for the
  next 30 years.

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Privatization effects
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Coverage EffectsSanitary Urban Area
 Source Sanitary Sector 2005 Report,
Superintendence of Sanitary Services, Mayo 2006.
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Operational Profitability of the Sector
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Effects on Investment

• Between 1995 and 2005 companies invested US
  2.789 million, of which, private companies
  invested 63 (US 1.763 million), and public
  companies 37 (US 1.026 millions).
• Projections for the period 2006-2016 indicate
  that this sector requires US1.339 millions.
• The private sector shall contribute with 100 of
  these requirements.

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State Annual Earnings With and Without
Privatization
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Which one is better Privatization or Concession?

• The principles of liberalism are condensed in a
  simple word ownership or the private control of
  the production factors (since the consumption
  goods must evidently be a simple private
  condition). Ludwig Von Mises.

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• In spite that the analysis term is relatively
  short and given the fact that the last sanitary
  company was given in concession in the year 2004,
  some productivity and management indicators show
  that the performance of the sanitary companies
  that were privatized is better than the companies
  that were given in concession

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• The average of clients per employee is higher in
  the privatized companies than in the companies
  given under concession
• The private companies billed in average more than
  the sanitary companies given in concession in
  terms of m3 of drinking water per employee.
• The explotation costs and average billing for m3
  are less in the private sanitary companies than
  in the sanitary companies under concession.
• The administration expenditures and sales per
  client are higher for the sanitary companies
  under concession than for the privatized sanitary
  companies.

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The investment carried out and projected is
higher for the privatized companies than the ones
projected for the concessioned companies.
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Main Problems of Concessions

• Lack of adequate legislation.
• Disincentive to invest.
• Decrease in the quality of the service.
• A higher price of the service.
• The public company as a shell, is maintained
  since it is the one granting the concession to
  the private party.

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Creation of tradable Water rights in Chile

• Since 1980 the property of water rights is
  independent from land property. Water rights are
  freely tradable in water markets. This has
  encouraged an efficient use of hydro resources in
  economic activities, like mining and
  hydroelectric generation.

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Situation Before 1981 Water Code

• Before there were no water rights in Chile.
• Instead there were water favors granted by the
  State by a revocable act, for which anyone who
  efficiently uses water was risking that the
  Authority would consider that there was not a
  need of such big amount of water and reduce its
  favors.
• In this situation, investment and productivity
  were not promoted since there was no assurance of
  benefiting from the investment.

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1981 Water Code Principles

•   The right of water usage is assigned at
  perpetuity. The complete domain of the water
  usage is delivered (use, enjoyment and
  disposition). Additionally it contemplates the
  auction mechanism to assign the right between two
  or more competitors.
•   The rights are transferable. This allows price
  system to operate. the price reflects the cost
  that each alternative use of the resource has.
•   It is not necessary to justify what you will
  do with the water consequently, the usage right
  is not tied to one specific use.

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• Consumptives and Non- Consumptives types of
  rights were established. This rights can be of
  permanent practice or eventual practice.
•   It creates the non consumptive right figure
  which allows overlapping possible use of the
  water with the only limitation that the rights
  should not affect the ones previously
  constituted.
•   Users manage the resource in an organized way.
• The role of the State is to maintain the
  administrative powers and to grant rights for
  usage.

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Transactions of Usage Rights

• There are few studies in Chile regarding rights
  transactions, and as it is stated in an analysis
  of the World Bank, the comparisons among them are
  limited since they are based on different
  information sources.

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• Bauer(1993) study presents data on the
  transactions executed in Los Angeles (VIII
  Region). He founded that 25 of the water
  transactions were independent from the land
  domain.
• Hearne (1994), delivers information on the
  transactions of water rights carried out in the
  Maipo, Elqui and Limari rivers (IV and V Region).
  He manily founded transactions were sanitary
  companies purchase water rights. The price paid
  per right was between US 1.100 - US 4.500.

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• A more recent study on water rights transactions
  is the one of O. Cristi, Vicuña S., T. de Azevedo
  L., Baltar A., (2000). This research analyses the
  behavior of the water market in the Limari basin
  (65.000 Ha. of irrigated water).
• The study concludes that the permanent market of
  water rights is quite developed. During the
  period 1980-2000, the percentage of reassigned
  water rights in each association, independently
  of the land, fluctuated from 20 to 50.
• At the same time, the increases in prices (of 41
  up to 240) indicates that the market is able to
  reflect the scarceness of water resources.

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Conclusion...

• There are not many studies which allows to make
  an accurate analysis on how water market has
  operated. Nevertheless, the results delivered
  show that there are transactions of these rights
  among peasants and among these with some
  companies performed through the market and the
  price system.