Presentation of Country Reports

Country: Chile

The Chilean Experience with Privatization

by Guillermo Pattillo

Universidad de Santiago de Chile

Contents (Powerpoint presentation)

1. The expected outcomes from privatization.

2. Privatization trends at a global level.

3. General guidelines for successful privatization.

4. The Chilean experience.  

1. The expected outcomes

Why to privatize? In general because SOEs have proved to be inefficient, then reducing social welfare.

The attempts through the 1970s and 80s to reform SOEs by imposing hard budget constraints, exposing them to competition and introducing institutional changes produced meager results.  

The effects of privatization can be grouped into five categories:

a) Firms performance, in general the evidence shows that privatization improves performance.

b) Fiscal balance and growth, privatization has fiscal benefits and is highly correlated with growth.  

c)   Welfare, effects have been positive. 

d) Employment, when correctly measured privatization has led to employment increases at both the firm and the industry level.

e) Income and wealth distribution, no clear answer so far (this is the least studied aspect of privatization).   

2. The global trends

In the last decade a clear upward trend can be observed, both in terms of numbers and value of transactions.

In 1990 global proceeds reached US$ 30 billion; in 1999 US$ 145 billion. Total global proceeds of the period: US$ 850 billion.

Developing countries (where privatization is a growing activity) account for something close to US$ 250 billion in that period.

In regional terms, Latin America accounted for a large share of non-OECD privatization process.

Foreign participation in this process has been increasing over the years, in Latin America, Eastern Europe and East Asia. 

Change in SOEs Activity as Percentage of GDP

3. General guidelines

Commitment and ownership, privatization requires strong political commitment and an informed society.

Ownership and competition, ownership change is needed to make competition effective.

Transparency, without transparency the acceptance of privatization is severely reduced.

Mitigating the social short-run possible impacts of privatization, in some cases  workforce reductions will be necessary so a system to compensate for layoffs must be in place. 

Environmental implications, in general SOEs pollute more than private firms. Privatization can be an opportunity for environmental improvements.

4. The Chilean case

The Chilean privatization process was one of the earliest in the current global move to privatize.

Privatization was part of a much wider process of economic liberalization that the country initiated in 1974.

Chile has had three major rounds of privatization: 1974-1980, 1984-1989 and since 1990.

In the first phase 259 firms that were expropriated or illegally taken during the Allende’s government were restored to their original owners. Also 118 firms were sold or liquidated and 34 (of 65) pre-1970 SOEs were privatized or closed.

At the end of the decade there were 40 SOEs.

The second phase was the time for telecom, electricity and steel production.

Since 1990 the privatization process slowed down significantly. Nevertheless, the driving force was the privatization of the main water and sewage companies (3) and of infrastructure management.

Today the process is unfinished. Still 38 firms, that represent around 9% of GDP, are SOEs.   

Chile: Evolution of SOEs (number of firms)

SOEs relevance in sectorial GDP

A general conclusion today (and one with which there is consensus) is that SOEs increased their profitability and efficiency after privatization.

But, the productivity of firms (private since the 80s) that provide regulated services has increased by more than in the case of non-regulated firms. 

Other privatization are:

1. Of infrastructure, starting in the second half of the 90s it has been transferred to private management highways, airports and  seaports. Overall this has been a successful process.

2. Of social services, in the early 80s a private pension fund and a private health insurance systems were introduced.     

Performance of privatized firms

The results refers to 37 non-financial firms, 19 of which works in regulated sectors.

The variables under analysis were profitability, efficiency, productivity and employment.

As a general conclusion, it can be asserted that the evolution in all these areas has been positive.

Changes in profitability

Changes in operating efficiency

Changes in profitability (adjusted)

Changes in operating efficiency (adjusted)

Employment in privatized firms (number of employees in average firm)

In synthesis

The privatization process in Chile has a clearly established net positive balance.

Today key sectors of the economy are far more efficient that they could have been in public hands.

The reduction in the size and ways of involvement of government in the economy has allow improvements in welfare, freedom and transparency.