Reforming the Urban Water System in Santiago, Chile

72 Pages Posted: 20 Apr 2016

See all articles by Mary M. Shirley

Mary M. Shirley

The Ronald Coase Institute

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Ana Maria Zuluaga

World Bank

Date Written: March 2000

Abstract

Why did reform in Santiago improve water system performance, when similar reform attempts under public management in other countries failed? In the late 1980s, Chile planned to privatize Santiago's sanitary works enterprise (EMOS) but instead reformed it under public ownership. It did so through a regulatory framework that mimicked the design of a concession with a private utility, setting tariffs that ensured at least a 7 percent return on assets, creating a neutral regulator independent of ministry intervention, and giving EMOS the right to appeal the regulator's tariff decisions.

This reform of Santiago's water system is often cited as a case of successful reform under public management. Comparing a comprehensive measure of welfare with a counterfactual example, Shirley, Xu, and Zuluaga show surprisingly large gains from Santiago's reform, given the relatively good initial conditions. (The gains accrued largely to government and employees, but consumers benefited from improved service and coverage.)

Why did reform in Santiago improve water system performance, when similar reform attempts under public management in other countries failed?

Chile has a long tradition of private water rights, shaped by early recognition that water is a scarce and tradable private good.

The reformed regulatory framework was designed to attract private investors to the water system and to motivate them to operate efficiently and expand the system.

Chile's unique electoral institutions sustained this framework under state operation after democracy was restored.

Chile's strong bureaucratic norms and institutions (permitting little corruption), combined with Santiago's relatively low-cost water system, permitted prices that effectively increased quasi-rents for investing in the system while minimizing the risk of inefficiency or monopoly rents. The authors also address the question of why EMOS was reformed but not privatized, and what the costs of not privatizing were. The system was privatized in 1999, but the changes from privatization are likely to be less significant than those introduced in 1989-90.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to draw lessons from regulatory reform and understand political and institutional change. This study was funded by the Bank's Research Support Budget under the research project Competition and Privatization in Urban Water Supply (RPO 682-64).

Suggested Citation

Shirley, Mary M. and Xu, Lixin Colin and Zuluaga, Ana Maria, Reforming the Urban Water System in Santiago, Chile (March 2000). World Bank Policy Research Working Paper No. 2294. Available at SSRN: https://ssrn.com/abstract=629141

Mary M. Shirley (Contact Author)

The Ronald Coase Institute ( email )

5610 Wisconsin Ave., Suite 1602
Chevy Chase, MD 20815
United States

HOME PAGE: http://www.coase.org

Lixin Colin Xu

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

Ana Maria Zuluaga

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

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