Profiting from increasing scarcity?

Allison writes*

In the wake of country-wide civil unrest in response to increased costs of living, inequality and privatization, the Chilean business model of water and sanitation provision is more relevant than ever.

Shortly after the fall of the Pinochet military regime during which significant neoliberal reforms were installed in the country, the urban water sector reform was enacted, which shifted the Chilean WSS sector into the hands of private (mostly foreign multinational) companies. Under this reform, the regulator, Superintendencia de Servicios Sanitarios (SISS), sets the tariffs with the service provider in order to establish “efficient tariffs” for the consumer that still provide full cost recovery and generate profit (by law, a 7% minimum return). A seldom accomplished feat, this pricing system aimed to recuperate the costs of operations and maintenance, including that of future restoration of infrastructure, in the tariff consumers pay. In order to guarantee affordability and protect the country’s poor, a subsidy was put into place, targeting the most vulnerable. In it, the government pays a portion of the price of those that qualify (according to the annual survey, Encuesta Casen), while the full costs are still shared on the consumer’s monthly bill. A key success of this model is its ability to ease the financial burden, while not distorting the price signals that promote sustainable water consumption.

This model has expanded access drastically, reaching 99.9% of the urban population in 2013. However, the increase in costs that accompanied privatization and its projected increase in coming years has the Chileans questioning the legitimacy of the system that many international scholars consider a “notable success”.

Chile’s greatest water demand in concentrated in the Santiago Metropolitan Region (RM), the nation’s capital and home to 40% of its population. The largest service provider, serving most of the RM is Aguas Andinas, majority owned by Spanish multinational Sociedad General de Aguas de Barcelona (AGBAR) and in part by the French Suez Lyonnaise Deaux. A fault of the system, as acknowledged by Chilean citizens, is the lack of transparency in the tariff negotiations between the SISS and Aguas Andinas every 5 years. The lack of overall citizen participation and the confidentiality of the process leads to secretism that raises questions surrounding the fairness of the relatively high prices consumers are being charged (pdf). This has led to perceived feelings of ‘being scammed’ and sentiments of victimization by big business in a context already characterized by resentment toward foreign companies that now dominate many Chilean industries.

Exacerbating the situation are further projected cost increases, due to increasing water scarcity. The country is experiencing what is being called a “mega-drought” due to the effects of climate change, jeopardizing the water supply to urban and rural populations. This necessitates additional investment in infrastructure to extend and secure water provision for Aguas Andina’s most demanding consumer base, RM, through projects such as the expansion of dams and piping to ensure adequate connections as sources dry up and become unusable.

Bottom Line: Whatever your opinion, the Chilean system will need to adapt to compensate for worsening water scarcity and the increase in prices that will come with securing the water supply for the Metropolitan Region’s 7 million inhabitants.

* Please help my Water Scarcity students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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