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Reforming the urban water system in Santiago, Chile

Author

Listed:
  • Shirley, Mary M.
  • L. Colin Xu
  • Zuluaga, Ana Maria

Abstract

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 seven 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, the authors 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? 1) Chile has a long tradition of private water rights, shaped by early recognition that water is a scarce and tradable private good. 2) 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. 3) Chile's unique electoral institutions sustained this framework under state operation after democracy was restored. 4) 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.

Suggested Citation

  • Shirley, Mary M. & L. Colin Xu & Zuluaga, Ana Maria, 2000. "Reforming the urban water system in Santiago, Chile," Policy Research Working Paper Series 2294, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2294
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    References listed on IDEAS

    as
    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Mónica Ríos & Jorge Quiroz, 1995. "The Market of Water Rights in Chile: Major Issues," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 32(97), pages 317-346.
    3. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    4. Hearne, R.R. & Easter, K.W., 1995. "Water Allocation and Water Markets. An Analysis of Gains-from-Trade in Chile," Papers 315, World Bank - Technical Papers.
    5. McCubbins, Mathew D & Noll, Roger G & Weingast, Barry R, 1987. "Administrative Procedures as Instruments of Political Control," Journal of Law, Economics, and Organization, Oxford University Press, vol. 3(2), pages 243-277, Fall.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Caputo, Michael R., 2014. "Comparative statics of a monopolistic firm facing price-cap and command-and-control environmental regulations," Energy Economics, Elsevier, vol. 46(C), pages 464-471.
    2. Sebastian Galiani & Martin Gonzalez-Rozada & Ernesto Schargrodsky, 2009. "Water Expansions in Shantytowns: Health and Savings," Economica, London School of Economics and Political Science, vol. 76(304), pages 607-622, October.
    3. Philippe Marin, 2009. "Public-Private Partnerships for Urban Water Utilities : A Review of Experiences in Developing Countries," World Bank Publications, The World Bank, number 2703, June.
    4. Kosec, Katrina, 2014. "The child health implications of privatizing africa's urban water supply," Journal of Health Economics, Elsevier, vol. 35(C), pages 1-19.
    5. repec:kap:itaxpf:v:24:y:2017:i:3:d:10.1007_s10797-016-9426-z is not listed on IDEAS

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