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In Chile, a Private Solution for a Public Good

6 MINS READJan 20, 2017 | 09:00 GMT
Water Scarcity: Chile
(Stratfor)
Summary

On paper, Chile can easily be considered a water-rich nation. The thin strip of land stretching along South America's western coast boasts over 50,000 cubic meters (13 million gallons) of water per person per year. But looks can be deceiving. Much of that water rests in the country's southernmost tip in the sparsely populated Patagonia region, far from most major Chilean cities. Transporting it north, where the bulk of the country's population and mining industry reside, isn't economically feasible. As Chilean citizens and companies vie for the scant water supplies left in the arid northern region, Santiago will struggle to balance the competing demands of the public and private sector, hamstrung by its own financial and regulatory constraints in the face of growing unrest. 

Measuring 4,270 kilometers (2,650 miles) from north to south, Chile experiences dramatic changes in its climate. The Atacama Desert of the north, one of the driest places on Earth, gradually fades into the country's temperate center, home to the majority of the Chilean population. This Mediterranean climate eventually gives way to the mountainous tundras and glaciers of the south.

Though agriculture is the biggest water consumer in Chile, the mining industry may be the most important. As the engine of the Chilean economy, its access to water is of the utmost concern to the government in Santiago, particularly as the sector grapples with low global commodities prices. But ensuring that the industry gets the water it needs to thrive is not easy, particularly when many of the country's copper mines are located in or near the Atacama Desert. (With only 208 cubic meters of water per person per year, the region's water availability is on par with that of many Middle Eastern countries.)

Meanwhile, even Chile's more temperate central regions are not immune to water scarcity. The country's densely populated capital depends heavily on snowmelt from the Andes Mountains, which feeds into surrounding rivers such as the Maipo and Mapocho, to meet its demand for water. This reliance has made Santiago vulnerable to seasonal and annual fluctuations in water levels. Floods and droughts can also create short-term water shortages in the major metropolitan area, and according to some estimates, the availability of water will shrink by 40 percent over the next 50 years as the city's population grows.

Worsening water stress seems almost certain to intensify the competition between urban residents and industrial and agricultural producers for Chilean water. In fact, signs of water stress have already begun to emerge: In 2015, a lengthy drought cut into the country's agricultural and industrial output. As the situation becomes more dire, water may move to the forefront of political debate in Chile, dragging Santiago's water management policies into the spotlight with it.

Back to the Market

Unlike most countries, Chile treats water like a private good. Other states that have partially adopted the same strategy, such as Australia and some areas of the United States, tout the commoditization of water as a way to promote efficiency in its use and encourage the production of higher-value goods — something that is vital to Chile, which relies on raw materials exports for a significant share of its gross domestic product but hopes to someday grow its economy by moving up the value chain. In theory, the privatization of water also stimulates investment in the infrastructure used to process and distribute it.

Valuing water properly is important for promoting sustainable consumption practices, but Chile's policies also show the pitfalls of privatization. In 1980, military ruler Gen. Augusto Pinochet amended the Chilean Constitution to make room for a new measure that made water a privately traded commodity the following year. In doing so, he scaled back the government's role in managing the country's water resources. This, combined with legislation in the 1990s, allowed private utility companies to step in to distribute water in urban areas. Santiago reformed the mechanism somewhat in 2005 in hopes of better protecting the environment, among other things, but in the process it separated water and land use rights. Because water tariffs based on market principles do not always account for scarcity, they often pit large industrial operations against local populations by exacerbating environmental and social problems related to water use, particularly in regions that expect to see rising demand or restricted supplies in the coming years. Moreover, because the market-based model reflects the value of water, albeit imperfectly, companies have less incentive to sell water in areas — often poor cities and townships — where profit margins are low. In September 2016, this issue came to a head when 2,000 people took to the streets of Santiago to protest the government's water management policies, a glimpse of the trouble that could be yet to come as the country's water supplies dry up.

Drilling Down Costs

Chile's citizens are not the only ones under strain for lack of water. The copper industry accounts for nearly half the country's total exports and almost one-third of the world's copper ore exports. When it suffers, so does the Chilean economy and the global copper supply.

For the most part, Chile has weathered falling copper prices well over the past few years thanks to the government's proactive policies. (As is true of other commodities, the copper industry is driven by demand from China's housing and construction sector, which has flagged recently.) But in 2016, stagnating copper prices began to take a toll on the Chilean copper sector, and they will likely continue to do the same in 2017. The oversaturated market is not expected to right itself until 2018 at the earliest.

In the meantime, Chile's copper mines — which include four of the five largest copper-producing sites in the world — have shifted their attention to cutting costs. Increasing water efficiency is one of the ways they hope to do that, especially as Chilean mines age and high-grade ores dwindle, forcing producers to exploit more water-intensive copper sulfides. Escondida, the world's largest mine, has already documented declines in ore grades and output over the past few years, while Codelco's El Teniente site was forced to put off its plans for expansion in early 2016. (The company's Andina and Radomiro Tomic mines are reportedly facing additional project delays this year.) With no immediate relief in sight to low commodity prices, these firms will turn to technical solutions such as desalination technology to meet their operational needs for water. Though this technology might be pricy to implement in the short term, it will be necessary for the industry's long-term success amid sustained water stress. In fact, Chilean mines already use nine desalination plants and are planning to build two more. Desalination technology is expected to meet half the industry's water demand by 2026.

Draining the Government Coffers

Chile has enjoyed more economic and political stability than most of its South American neighbors throughout the ongoing commodities slump. Some of the countries in the region went on spending sprees while commodities prices were high and were hit especially hard when the boom abruptly ended. Chile, by comparison, has managed its public finances responsibly, which has steadied the country during the copper sector's upheaval.

Nevertheless, low copper prices have left Santiago with no choice but to tighten its purse strings, making it nearly impossible for the government to ramp up public spending or enact much-needed labor reforms in the mining sector. This may only fuel social unrest as concerns about water scarcity and pollution rise. Many in Chile are advocating that water be treated as a public good or right, as it is elsewhere in the world. But faced with its current budget constraints, Santiago can do little to answer their calls.

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