Chile has been a pioneer in the practice of privatisation since the mid 1980s. The partial privatisation of the water and sanitation sector began in 1998, several years after the sector was reorganised by the state. Four years on, a study compares the performance of the private and state-owned companies.

Water and sanitation privatisation was assisted by a new law in the early 1980s that separated water rights from land ownership and allowed them to be traded freely. Some of the biggest consumers of water rights were water and sanitation companies, which bought in progressively greater amounts to meet their consumers’ growing demand. The cost of water rates jumped with the growth in service coverage and the addition of new services, such as sewerage treatment.

The state simultaneously adjusted rates to reflect the actual cost of providing the services which meant a significant rise in prices, increased in stages. Nearly all households were being provided with water and sewerage by 1995.

Due to the amount of funding the companies needed to provide these services, and an increasing demand that Chile improve its poor environmental performance, privatisation became a priority. This process began in 1998 and by 2001over 75 percent of households were being served by privately-controlled water companies. These companies were owned by a consortia of British, French and Spanish firms that brought with them new technology and a huge injection of capital.

A comparison of the newly privatised companies with their state-owned counterparts found that:

• In 2001 the private companies invested 70 percent more than they had in 1998, while public companies invested almost 70 percent less due to cash flow difficulties. 
• As they invested more and added new services, rates charged by the private companies rose on average 20 percent more than that of the public companies.
• Private companies’ rates, however, tended on average to be 40 percent lower than the rates of public companies, possibly because the state still owned the companies with the smallest sizes and highest unit costs.
• While the performance of private companies improved in accordance with four common efficiency indicators – expenses; return on equity; return on assets; and operating income – the performance of their public counterparts has declined in all four.

The study notes that perhaps more important than the differences between the performance of private and public companies is how quickly these differences came about – less than two years. Also, because of the obvious gap in investment between the two, the remaining state-owned companies will in all likelihood eventually be privatised.

The study also notes the following:

• While privatised companies tend to increase rates in the short term, because of their superior management and greater efficiency, rates will probably be lower in the long term.
• Short-term hikes in water rates, necessary to fund new investments, need to be dealt with sensitively so that this does not become a political barrier to privatisation.
• Chileans have accepted higher water rates in exchange for a better quality service and new services. This may not be the case in societies where the privatisation of public services is not as socially acceptable.

Source(s):
‘Water Services in Chile: Comparing Private and Public Performance’, G. A. Bitrán and E. P. Valenzuela, Public Policy for the Private Sector, March 2003 Full document.

id21 Research Highlight: 24 June 2005

Further Information:
Gabriel. A. Bitrán
Avenida Nueva Tajamar 481
Oficina 2003 (Torre Norte)
Las Condes
Santiago de Chile

Tel: +56 2 203 4005
Fax: +56 2 203 0553
Contact the contributor: gbitran@bya.cl

The World Bank

Suzanne Smith
Managing Editor
Room I9-009
The World Bank
1818 H Street, NW
Washington, DC 20433
United States

Tel: +1 202 458 7281
Fax: +1 202 522 3480
Contact the contributor: ssmith7@worldbank.org

World Bank Public Policy Journal

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'Privatisation and the Provision of Urban Water and Sanitation in Africa, Asia and Latin America'