Development Aspects Impressum Editors

Urban drinking water supply and sewerage services in Chile: Determining factors of performance

Soledad Valenzuela and Andrei Jouravlev⁶

The provision of drinking water supply and sewerage services in Santiago, and in the other urban areas in Chile, is of interest for two main reasons:

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  The high levels of service coverage, operational efficiency, service quality and complete self-financing (and even profitability, in the sense of contributing to, rather than being financed from, the governmental budget) achieved in the pub- lic sector provision of those services
  
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  The scale of investment and the lack of significant regulatory conflict or the abil- ity to settle them quickly and pragmatically under the private service provision model.
  

The analysis of this case gives rise to various conclusions about what determined the high level of performance and development of drinking water supply and sew- erage services in Santiago and the country’s other urban areas.
The first and possibly most important conclusion is that the drinking water supply and sanitation sector “is not an island” (and of course neither is any par- ticular service provider, no matter how large and significant). In other words, any problems of service coverage or quality do not originate solely in the sector’s in- stitutions (policies, laws, traditions, organization, etc.), nor can they be solved by these institutions alone.
As a result, any analysis of sectoral reforms (successful or otherwise) cannot ignore or be separated from their socio-economic, political and cultural context. One of the implications of this is that public policies cannot be directly transplanted into other realities. Ignoring this has sometimes led to the formulation of over- simplified, uniform and generalized recommendations that turned out to be mainly ideological and even counterproductive. This study therefore analyses factors that are both exogenous and endogenous to the sector, with special emphasis on the impact of macroeconomic policies on patterns of service sustainability and with a long-term vision spanning over several decades.
Factors explaining the success of the reforms include:

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  Professional capacity and a vision of national development within the country
  

and the creation of solid institutions with a long-term vision that were able to re-

5. 
   Reprint of Valenzuela, S., and A. Jouravlev (2008). “Urban drinking water supply and sewerage services in Chile: determining factors of performance”. Circular of the Network for Cooperation in Integrated Water Resource Management for Sustainable Development in Latin America and the Caribbean, No. 27 (August). Santiago, Chile: Economic Commission for Latin America and the Caribbean. Available from www.cepal.org/drni/noticias/circulares/8/32078/carta27in.pdf.
   

cruit the best professionals, as well as the high quality of the state apparatus that could take on the implementation of complex public policies (such as regulation and the provision of targeted subsidies) requiring a certain level of confidence in the state on the part of corporate management, investors and the public.

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  Government discipline concerning criteria for investing fiscal resources, with an insistence on minimum returns, prioritizing investment based on economic and social evaluations and its contribution to national development, as approval cri- teria.
  
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  In Chile, governments of various political orientations have always managed this sector responsibly and given it priority, even in terms of allocating funds during periods of crisis. The public authorities have therefore never allowed the situation to deteriorate to the point of needing urgent and radical reforms in response to a deep crisis (as has been the case in several of the region’s countries where service providers have become so discredited that a social consensus is generated around the need for far-reaching and radical change). In Chile, the process has been one of long-term improvement, where what is learned in one stage is built upon in the next. This is extremely important, as the experiences of several other countries in the region suggest that the drain of human resources and the general deteriora- tion at the organizational level have a prolonged effect over time. After any such crisis, it takes a long time to recover certain standards of management efficiency.
  
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  In terms of the origin of reforms, rather than an externally promoted process against a backdrop of weak and poor-quality institutions, limited government bargaining power in interactions with third parties (investors, multilateral banks, etc.) and structural problems in state finances, Chile has seen a process of reflec- tion and broad consensus built up at the political level and within the professional sector, which has laid the foundations for its consolidation in the long term.
  
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  As for the pace of reforms, rather than sweeping and radical changes of the “big bang” variety, the strategy has been one of gradual change governed by realistic and pragmatic judgement and a particular concern for ensuring overall coherence and keeping sight of the country’s actual capacities. These steps are as follows: to prioritize the state-financed expansion of coverage through an integrated organi- zation which makes use of economies of scale; to improve the efficiency of public providers, which are transformed into corporations subject to the same rules as the private sector; to move over to self-financing charges along with an effec- tive subsidy system for low-income groups; to adopt a regulatory framework and set up the regulatory body; and to use the experience accumulated over all these years to fine-tune the subsidy system and the regulatory framework. Only once all this had been done was the decision made to promote private-sector participation. The original regulatory framework was defined and enhanced us- ing general legislation formulated with a high level of participation of relevant stakeholders, and avoiding the rigid approach of contract-based regulation.
  

In contrast to the public policies implemented in the overwhelming majority of Latin American countries, where drinking water supply and sanitation services are provided mainly by municipalities as a result of decentralization reforms of the

1980s and 1990s, the central government of Chile began to strengthen its pres- ence in the sector in the 1930s, as part of a process that culminated in the creation of the National Service of Sanitary Works (SENDOS), the Metropolitan Sanitary Works Company (EMOS) and the Valparaiso Sanitary Works Company (ESVAL), which all went on to become corporations organized by administrative region. Chile has thus opted for an industrial structure based on the vertical integration of all stages of service provision, as well as on regional companies covering large geographical areas. In addition to taking advantage of the significant economies of scale and scope that exist in the drinking water supply and sewerage sector, this model has the following advantages:

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  Facilitates regulatory and control activities, compared with a system of numerous
  

municipal systems

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  Avoids subjecting service provision to a relationship with local governments which in many countries has quite often resulted in the politicization of essen- tially technical decisions and a misuse of public resources
  
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  Gives clear signals to companies in terms of watershed protection, optimization of water abstraction and water pollution control. Water law has also had a posi- tive effect in this regard by making water allocation more flexible and enabling a relatively smooth reallocation of water rights to urban uses in river basins that are in principle saturated by agricultural use, thereby achieving a more efficient use of scarce water resources
  

Unlike most other countries in the region, where chronic underfunding of water supply and sanitation services remains a serious ongoing problem, Chile has man- aged to consolidate a tariff system that not only recovers all the costs of service provision (operation, maintenance, investment, acquisition of water rights), but also generates significant profits for owners, whether private investors or the state. This process has not been completely free of conflict, and has taken over a decade to become fully consolidated. It has been made possible by a combination of fac- tors, some endogenous and some exogenous to the sector. The main endogenous factors include:

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  The creation of an effective subsidy system for low-income groups. In Argentina, for instance, when drinking water supply and sewerage services in the Buenos Aires Metropolitan Area were privatized in 1993, the financial policy applied to the concession was initially based on long-term self-financing exclusively through tariffs, with the state rejecting all financial responsibility. It was only in a context of growing economic crisis in January 2001 that the authorities decided to create what was known as the “social tariff” to subsidize demand and put an end to disconnections. In any case, this measure in Argentina has more limited scope and coverage than the subsidy system that has been operating in all urban areas of Chile since the early 1990s.
  
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  A gradual readjustment of tariffs until self-financing was achieved over a transi- tion period lasting several years, with a view to easing the impact of change on the population
  

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  An intelligent and proactive commercial policy on the part of service providers, which not only were firm in applying charges, like supply cuts, and disconnection and reconnection charges, etc., but also adopted various measures to help cus- tomers adapt to higher tariffs, e.g. educational campaigns on the true cost of the service and how to rationalize consumption, assistance in applying for subsidies, payment facilities to settle debts, etc.
  
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  Self-financing tariffs were only introduced following an intense efficiency drive in public companies in order to avoid passing on any cost of inefficiency to cus- tomers
  
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  The creation of a regulatory system that – although not without shortcomings – avoids an indiscriminate and unjustified rise in tariffs, offers companies incentives to reduce costs and reassures consumers that their interests are being protected.
  

The most significant exogenous factors are as follows:

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  The strong payment culture among the population, thanks to general and sec- toral public policies (such as early emphasis on improving collection even with low tariffs)
  
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  The fact that tariff-adjustment coincided with a period of rapid economic growth, major political and social consensus, low unemployment and considerable in- creases in real wages helped reduce the impact on the population, given that the same process would have been received very differently had the economic situation been worse
  

Another major factor in sector sustainability that sets the reforms in Chile apart from those undertaken in other countries in the region was the fact that, hand in hand with tariff adjustments towards self-financing, an effective subsidy system using resources from the national budget was introduced to target low-income groups. This measure had the following positive effects on service sustainability patterns:

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  It has been possible to significantly raise tariffs without triggering massive oppo- sition among users or generating payment-collection problems, simultaneously protecting the most vulnerable groups
  
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  Unlike in many of the region’s countries, where cross-subsidy systems have weak- ened the finances of service providers, the subsidies in the Chilean system are paid directly by the state to the companies providing the service, so that the latter have the income stability to be able to invest, offer services, recover their investment and make a profit
  
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  Subsidies targeting the lowest income groups made it possible to optimize the use
  

of public funds available for sectoral objectives

It should be borne in mind that it has been possible to implement a targeted de- mand subsidy thanks not only to the sector’s decision makers and the active col- laboration of companies and regulators, but also to the following favourable condi- tions exogenous to the sector:

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  Prior existence of a nationwide system that makes it possible to identify and clas- sify low-income groups and target social-welfare programmes accordingly
  
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  Efficient and relatively incorrupt public administration at the central and munici- pal government levels
  
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  Low levels of poverty and indigence by Latin American standards
  

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  Orderly public finances and an efficient tax system capable of generating suf- ficient resources, even in times of crisis.
  

Lastly, the effects of adequate macroeconomic policies have been clearly apparent in the case of Chile. The country’s development model is based on macroeco- nomic balances and exports that make use of comparative advantages. From the mid-1980s, this strategy has generated buoyant export development and consider- able economic growth, which have in turn brought down unemployment, poverty and indigence, while significantly improving wages. As the country’s macroeco- nomic balances and realistic exchange rates keep debt under control, the credit systems and interest rates are relatively moderate and do not deter investment. Furthermore, public policies, in addition to promoting an environment favourable to investment, have been changing in pace with social and environmental goals, while sound macroeconomic policies have helped generate the resources needed to achieve them.