Chile goes off the boil

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The privatisation process started in Chile in 1998 has ground to an abrupt halt. The first five state water companies to be privatised were contested by, among others, Thames Water, AWG, Biwater, Ondeo, Vivendi, Aguas de Barcelona and Iberdrola. In 2001, the Chilean government changed tack and adopted the concession system.

Under the new regulations, Chilean water companies are to remain in state hands with concessions granted for a period of 30 years. Last year the government invited bids for two companies. Essam, the utility which provides water and sewerage services in the Maule region, was awarded to Thames Water of the UK for $171 million. However, Essar, which provides services in the Araucanía region, failed to attract interest from any of the international private water companies.

The concession system has proved particularly unattractive to the private sector as companies are expected to make high investments for limited returns. Thames will have to spend close to $100 million in the first five years of its concession in Maule. A private operator willing to take on Essar would have to invest around $190 million over the next 15 years.

Returns in the Chilean water sector last year were generally disappointing. Agbar/Suez invested a total of $1.1 billion in Aguas Andinas (formerly Emos). In 2001, the company generated a profit of $38.5 million. AWG invested $190 million in Esval and made a profit of $13.1 million last year. Iberdrola invested $90 million in Essal and the company generated a modest $2.4 million profit in 2001.

Thames, which has a market share of around 20%, spent $400 million acquiring stakes in Essel and Essbio. Essel made a profit of $2.3 million in 2001 while Essbio generated returns of $6.4 million. Essbio was the only private company to experience a fall in profits compared to the previous year. Profits were down 6.1% even though the company increased its sales. High investments and operating costs were to blame for the drop.

In total, Chile needs to invest around $2.5 billion on water infrastructure, according to figures from the US Department of Commerce. Of this, $400 million will need to be spent on WwTPs, $700 million on stormwater collection, and $1.4 billion on drinking water production and distribution.

“It is very likely that the government will insist on the concession system for Essar and the other companies still owned by the state”, Gonzalo Delaveau, a partner at Santiago law firm Guerrero, Olivos, nNovoa y Errázuriz told GWI.

Of Chile’s six medium-sized water companies, three – Maipu, Essco and Essar – have not yet been privatised. Of the 12 smaller companies, seven – Essan, Essat, Emssat, Esmag, Emssa, Servicomunal and Coopagua – are still publicly run. The three remaining medium-sized companies have a combined market share of 12.8% while the seven smaller utilities account for a further 10.3% of the market.

However, complex rules on market share limit private ownership of Chilean water companies leaving Agbar/Suez, with a market share of 40.3%, little scope to bid for new concessions. Little in the way of
market activity is forecast for the second half of 2002.

The state development agency, Corfo is expected to sell part of its stake in companies in which it holds more than 35% of the stock. Chilean law permits the sale of 65% of water utilities and requires 35% to remain in state hands. The proposed sale will increase the secondary market for Esval, Aguas Andinas, Essbio and Essel but only has relevance for Aguas Andinas in which Corfo holds 44% of the stock. The additional 9% stake guarantees the appointment of a director.

While Essar failed to attract bidders first time round, there is considerable speculation that AWG may be interested when the utility is rebid, planned for later in the year. AWG is thought to be keen on purchasing Iberdrola’s 51% stake in neighbouring Essal, which serves the Los Lagos region (Region 10). “If AWG buys Essal it may look more favourably at Essar for synergies and to realise economies of scale”, said Delaveau.

Iberdrola is reportedly keen to exit the water sector and sell its assets in Chile.

“We are interested in Essal and await more details of the sale process Iberdrola is proposing”, said Patrick O’Leary, AWG’s managing director for international business. “Taken together, Essal and Essar give greater potential for value”, he added. At the end of 2001, AWG had a market share of just under 13%. However, the group is likely to face competition from Thames which has also expressed interest in Essal.