Chile��s Individual Action Plan on Competition Policy

Sixth version, October 1997

Annex 10��

Chile has privatized most of the public utilities and is promoting private investment in infrastructure. In general, there are no barriers to private investment deriving from regulatory regimes.

An important objective is to review regulatory regimes for promoting private investment and competition. Chile is trying to implement pro-competitive regulatory frameworks for utilities or natural monopolies, and is promoting private investment in ports, airports and other infrastructure.

Extent to which deregulation has been undertaken��:

Chile has had three major rounds of privatization: (1) 1974-1979, mainly banks, followed by manufacturing firms, the process ended with the 1982 financial crisis; (2) 1984-1989, mainly telecommunications, electricity and steel production; and (3) since 1990, mainly in air and railroad transportation, mining and electricity.

The most recent privatizations have been: in 1993, 49% of the Iquique duty-free zone was privatized. In 1994, the freight division of the National Railroad company was auctioned, and the Government sold part of its stock in the airline company Lan Chile and in the electrical utility Edelnor. In early 1996, CODELCO sold 26% of its main electricity plant to private investors and it is expected to sell another 50% before the end of 1997. In 1997, procedures to privatize a major state-owned electricity concern were initiated.

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Deregulation

During the seventies, Chile, from being an "Interventionist State", which could intervene directly in the allocation and administration of economic resources, became a "Regulatory State" that fixes rules through which the role of open and competitive markets as a primary means for allocating economic resources is protected and preserved.

For an efficient performance of this new role, deep reforms were promoted in the legal framework, the State structure and the public administration: (1) elimination of price fixation and controls, the institution in charge (Dirinco) was transformed into the Consumer's National Service (Sernac); (2) elimination of legal restrictions to investment and operation of enterprises in most of the sectors; (3) external opening and establishment of a flat tariff rate, which contributed to enhance competition in the tradable sector; and (4) the institutional reform of the basic services on electricity, telecommunications and drinkable water, which involved the establishment of a concessions regime, the fixation of prices of self financing in efficiency conditions, and the conformation of prosecutor's agencies.

In addition, as stated in the Chapter on Competition Policy, in 1973 a new Competition Law was promulgated (strengthened in 1979), which created the anti-trust commissions; and the National Commission in charge of investigating the existence of distortions in the price of imported goods was created in 1983.

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Extent and coverage of remaining regulations

The Constitution of 1980 guarantees the right of any local or foreign person to develop any economic activity, as long as they respect the legal regulations that govern that activity, and do not harm morals, public order or national security.

The remaining regulations are not aimed at impeding free and open trade and investment. They are aimed at improving competition and avoiding trade distortions. The sectors that have undergone major reforms are financial services, energy, telecommunications, water and sewerage services and transportation. Reforms essentially focus on pricing and the establishment of concession systems.

With respect to pricing, the tariffs for basic services are subject to regulation because of their monopolistic character (for instance in distribution of electricity, telecommunications, and water and sewerage). The pricing is in all cases according to marginal cost and there is no discrimination among sectors or consumers or national or foreign companies. The institutions in charge of setting these tariffs vary for each service, with the participation of the Market Development Division of the Ministry of Economy.

The concession systems are aimed at allowing the increasing incorporation of private capital in public utilities and services. The systems, as well as the institutions in charge vary for each service. In most of the sectors, the companies which have been conferred concessions are obliged to provide the related services within the Service Area (Area de Servicio) that is established with the Government and that does not necessarily correspond to the Concession Area (Area de Concesi�).

For a complete picture on the main market conditions that affect the provision of services under the following sectors, please refer to areas 3 and 4 on trade in services and investment regimes.

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Telecommunications

- Law No18.168, General Law on Telecommunications, Official Gazette October 2, 1982.

- Supreme Decree No119 of the Ministry of Transportation and Telecommunications, General Regulation on Telecommunications, September 10, 1984.

- Supreme Decree No189 of the Ministry of Transportation and Telecommunications, Multi-carrier Regulation for Local and International Long Distance Services, June 10, 1994.

- Decree No425 of the Ministry of Transportation and Telecommunications, Public Telephonic Services Regulation, December 27, 1996.

(1) The telecommunication sector has been fully privatized. There are 27 private companies: 15 carriers, of which nine are in operation; nine local companies; and three cellular phone companies. Seven companies have concessions to operate as long-distance carriers. With the introduction of the multi-carrier system, in 1994 tariffs were reduced by 30%. In addition, the private companies have undertaken important investments in infrastructure, including networks of fiber optics and satellite equipment.

The General Law on Telecommunications establishes that:

- concessions are required for the provision of (i) public services, (ii) intermediary services, and (iii) radio broadcasting. They are conferred for 30, 30 and 25 years respectively by Decree by the Under-Secretary of Telecommunications. Concessionaries can freely provide auxiliary services through the public network, and no concessions are required for it.

- for the installation, operation and exploitation of limited services of telecommunications for specific enterprises or persons, a permission is conferred, upon request, for 10 years (renewable) by the Under-Secretary of Telecommunications by means of a simple Resolution. If the Under-Secretary does not refuse the permission within 60 days, it is presumed conferred. The limited services provided by an experimental station or by regional or local stations need a license conferred by the Under-Secretary for 5 years, renewable.

- concessions for telecommunication services of free reception, radio broadcasting, or services for which a technical regulation establishes the need for a limited number of concessions, are conferred after a public call (concurso p嚙箭lico), each 4 months.

- More than one concession or permission of the same type can be conferred in the same geographical zone. Concessionaries are obliged to provide services within the Service Area.

(2) The regulatory role of the State in telecommunications sector is undertaken by the Under-Secretary of Telecommunications (SUBTEL), which controls and surveys public telecommunications services and protect users. SUBTEL is separate from, and not accountable to, any supplier of basic telecommunications services. It is in charge of implementing and surveying the application of the General Telecommunication Law N 18.168, approved in 1982 and subsequently amended. The first amendment, in 1987, incorporated a procedure for establishing the tariff for local public services, long-distance national and international services, and services provided among concessionaries through interconnections, in the event of market failure. The law was amended a second time, in 1994, to allow competition in the long-distance market.

Tariffs of public services and of intermediary services contracted among enterprises may be freely established by the provider. However, if there is a resolution by the Resolutary Commission to the effect that market conditions do not allow tariffs to be determined by market forces, these tariffs are fixed according to the provisions of the General Law of Telecommunications N 18.168. Tariffs so fixed are based on the long-run marginal cost of a hypothetical efficient enterprise and are indexed according to increases in the costs of production of the enterprise. They are calculated every five years by the Ministry of Transportation and Telecommunications and the Ministry of Economy.

The General Telecommunications Law stipulates that the public telephone service must provide access to the general network. Inter-connection with a major supplier is ensured at any technically feasible point in the network. Such inter-connection is provided under non-discriminatory terms, conditions (including technical standards and specification) and rates. A service supplier requesting inter-connection with a major supplier has a right of recourse to resolve disputes regarding terms, conditions and rates for- inter-connection. The dispute settlement body is generally the regulatory body, SUBTEL. If the parties involved in the dispute disagree with the resolution, this may be appealed in the courts. However no such disputes have taken place.

(3) Chile made specific commitments in the WTO Telecommunications Services Agreement in domestic and international long-distance basic telecommunications services.

Chile, in the negotiation process, decided to exclude some sectors of its commitments since liberalization commitments of many of the WTO members are well below the openness level of Chile's current regime. Sectors without commitments include local basic telecommunications services, one-way satellite transmissions of Direct-to-Home and Direct Broadcast Satellite television services and digital audio.

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Water and sewerage services

- Decree Law No70 of the Ministry of Public Works, December 30, 1988 (amended).

- Supreme Decree No453 of the Ministry of Economy which fixes the tariffs of water and sewerage services, January 17, 1990 (amended).

- Decree Law No382 of the Ministry of Public Works which establishes the concession system and the sanitary services exploitation regime, December 31, 1987.

1) The companies operating in the provision of water and sewerage services are 52, of which 6 are private. The State-owned enterprises represent 96.2% of the market.

Water and sewerage services companies must have the sole purpose of covering this activity. A concession in a particular concession area must be requested to the Superintendency of Sanitary services. The request is published in the Official Gazette to allow interested companies to present their offers within 60 days. Finally, the concession is granted by the Superintendency to the company which offers the lower tariffs. These tariffs may not exceed the regulated tariffs.

Concessionaries are obliged to provide services within the Service Area.

2) The regulatory role of the State in the water and sewerage services sector is undertaken by the Superintendency of Sanitary Services, which reports to the Ministry of Public Works.

Water and sewerage services provision is subject to pricing. The Regulatory agency fixes maximal tariffs for both fix and variable prices, based on the long run marginal cost of a hypothetical efficient enterprise and indexed according to increases in the costs of production of the enterprise. Tariffs are adjusted periodically according to the inflation rate and new tariffs are determined every five years.

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Energy

A Electricity

- Decree Law No1 of the Ministry of Economy, General Law on Electrical Services, 1982.

1) The electrical services sector has been mostly privatized. 58 companies are operating, of which 20 are concessionaries for generation, 4 for transmission and 36 for distribution of electricity.

The Decree Law No1 of 1982 establishes that:

- Concessions are compulsory for the distribution activity subject to pricing and that make use of public goods. They can be temporary, and then they are conferred for a period of two years by the Superintendency of Electricity and Fuels; or permanent, and then they are conferred by Decree by the Ministry of Economy after a technical evaluation by the Superintendency. Concessionaries are obliged to provide services within the Service Area.

- Concessions are optional for generation and transmission. However, the right to use public goods is conferred trough concessions, then, usually, hydraulic stations, or electric substations need a concession. The Law does not contemplate concessions for thermoelectric stations.

2) The regulatory role of the State is undertaken by the National Commission of Energy, the Superintendency of Electricity and Fuels, the Ministry of Economy and the Centers for the Economic Dispatch of Charge (CDEC) of each of the electrical systems. The CDEC coordinate the operation of the companies which generate electricity, they determine the value of the electricity transfers among these companies based on the marginal cost per hour.

Tariffs may be freely established. However tariffs are fixed for the distribution services for users of low consumption since electricity is most commonly provided to them under monopolistic systems and the users lack of power of negotiation. Two prices are fixed. The knot price (precio de nudo) which is the price paid by the distribution companies is fixed each semester. The distribution value added price (Valor Agregado de Distribuci¢n), which is the price paid by the final consumer is fixed each 4 years, based on the long run marginal cost of a hypothetical efficient enterprise and indexed according to increases in the costs of production of the enterprise.

B Gas

Concessions for distribution and transport are granted by the Superintendency of Electricity and Fuels. They are free. There is no pricing.

C Hydrocarbons

Concessions are not granted for the exploitation of hydrocarbons (liquid or gaseous), or for any deposits located in the ocean that are not accessible from land. However the state can extend an operational contract, which allows an individual (national of foreign) to exploit those minerals for which concessions are not granted (they are actually granted for petroleum).

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Transportation

The Under-Secretary of Transport is responsible for regulating transportation services. The general guidelines of the transportation policy are: (1) the State does not operate transport companies, with the exception of three companies managed by an autonomous board (Santiago Metro which administrates the subway of Santiago, the train company for passenger transportation Ferrocarriles del Estado, and a maritime transportation enterprise TRANSMOCHILAY); (2) the transport companies operate under a free competition framework, the State establishes solely technical regulations with a limited economic impact; and (3) the State does not subsidize transport companies, subsidies are only granted to services in isolated sites where the State has a responsibility to ensure regular transportation.

At present, the aim of the authorities is to increase the participation of the private sector in the administration of roads, ports, airports and railways.

A Maritime transport regulations

- Decree Law No2.222, Navigation Law, Official Gazette May 21, 1978.

- Decree Law No3.059 on the National Merchant Marine, Official Gazette December 22, 1979.

(1) The maritime transport services sector has been fully privatized, with the exception of one company. The market share of the state-owned maritime transportation company TRANSMARCHILAY is of minor importance, since the company operates solely in the fjords of Chilo? Another state-owned maritime transportation company, EMPREMAR, was privatized in 1996.

(2) The Under-Secretary of Transportation, inter-alia, regulates and surveys international transport and cabotage. The Merchant Marine Commission is in charge of ensuring that the principle of reciprocity is enforced. The General Directorate of the Marine Territory and Merchant Marine is in charge of safety at sea, and grant licenses to crew members. The State does not intervene directly in the activities realized by maritime transportation companies, it does not fix tariffs and does not assign routes.

Transport policy is based upon the principle of freedom of maritime navigation, however cargo preferences for national vessels may be applied for reciprocity reasons. At present, public and private ports and maritime transportation companies coexist.

In coastal trade, cabotage is reserved to Chilean vessels, however, under certain circumstances, foreign vessels may also operate: (i) to and from Arica; (ii) when the volume concerned exceeds 900 tons, prospective carriers have to participate in a public tender for concessions; (iii) when the volume concerned is below 900 tons and there are not Chilean vessels available, the Maritime Authority may give its authorization; and (iv) for the transportation of empty containers under reciprocal treatment.

Only a Chilean or legal person registered in Chile is qualified to register a ship in Chile. The president, managers and directors must be Chilean, and more than 50% of the capital of the Company must be owned by Chileans. Ships, other than for fishing owned by foreigners may be registered as Chilean ships if the foreigners are domiciled in Chile, is the principal location of their business is Chile or if they exercise permanently a profession in Chile.

(3) Chile participated in the WTO maritime transportation negotiations.

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B Air transport regulations

- Decree Law No2.564, Commercial Air Navigation Law, Official Gazette June 22, 1979.

- Law No18.243, which modifies the Decree Law No2.564 of 1979, Official Gazette September 24, 1983.

(1) The air transport services sector has been fully privatized. At present, 34 airlines operate in Chile, seven of which are private national companies. Thirty of these airlines engage in the transportation of passengers, cargo and mail, and the other three transport solely merchandise. There are 25 additional non-regular cargo airlines.

(2) Commercial air transportation is regulated by the Civil Aeronautics Board (JAC), while the General Directorate of Civil Aeronautics (DGAC) is responsible for technical and operational matters. Both agencies are in charge of approving the entry of new airlines to the Chilean market.

Under the Commercial Navigation Law of 1979, Chile adopted an open sky policy regarding transportation of passengers and merchandise. Chilean and foreign airline companies are allowed to supply commercial air transport services both domestically and internationally. However, the participation of foreign companies is allowed only on the basis of reciprocity. The open sky policy has been complemented by the negotiation of traffic rights with different countries, resulting in 22 bilateral air transportation agreements, as well as several multilateral aviation agreements.

While companies may freely establish their tariffs, under Law N 18.243 of 1983 the JAC was allowed to negotiate international airline tariffs when another country fixed or attempted to fix tariffs. The law is intended to safeguard the interests of companies and users. In addition, the JAC is allowed to limit the access of foreign companies only if other countries limit the access of Chilean airlines to international routes.

Private companies, including airlines, can obtain concessions from the ministry of Public Works to supply auxiliary services such as handling, cargo, catering, etc. The concessions are granted for 5-25 years, according to the size of the investment; both nationals and foreigners may participate in the bids to obtain a concession. Limitations on the use of foreign labor, stipulated in Chile's horizontal commitments, apply in the following auxiliary air services: opening of offices, issue and sale of air transport tickets, computer reservations systems, ground operation of support equipment and aircraft maintenance. All other modes of supply have no limitations or Chile made no commitments with respect to these items.

The DGAC is in charge of the administration and control of the infrastructure and equipment of airports, as well as the establishment of technical standards (which are based on international standards).

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Financial services

In Chile, there is a local presence requirement to provide financial services, with the exception of the reinsurance activities.

Chile participates in the WTO financial services negotiations.

A Banking services

- DFL No252, General Banking Law, Official Gazette March 30, 1960.

- Law on the Superintendency of Banks and Financial Institutions.

- Central Bank General Compendium of Rules.

- Decree Law No600 of 1974, Foreign Investment Statute.

(1) The banking sector has been fully privatized, with the exception of one state-owned enterprise, Banco del Estado, accounting for 17.0% of deposits and 14.7% of assets. Some 30 private banks are registered, of which 17 are foreign banks, accounting for 18.5% of deposits and 21.1% of assets, 12 are domestic private banks, and 3 are financial enterprises.

To operate in Chile, banking companies must be legally constituted as corporations according to Chilean Law, and obtain an authorization from the Superintendency of Banks and Financial Institutions. Foreign banking institutions may only operate through share-holdings in Chilean banks established as corporations, subsidiaries and branches. They can also operate in Chile through a representative office but such offices cannot supply banking services.

(2) The Banking Sector is regulated by the Superintendency of Banks and Financial Institutions, which reports to the Ministry of Finance.

The banking companies established in Chile (Chilean Banks as well as subsidiaries of foreign banks) are subject to the same rules of operation and supervision. Among others, they are subject to the same capital requirements, credit limits, requirement of asset classification, and transparency obligations. Their deposits are guaranteed by the State.

Banks are allowed to trade foreign exchange on the official foreign exchange market. Since mid-1992, banks and other local firms have been allowed to trade currency futures and options, including foreign currency interest futures and options. There are no restrictions on the setting of interest rates that the banks can charge, with the exception of measures to prevent usury (for example, interest rates on consumer loans can not be more than 50% above the average market interest rate published monthly in the Official Gazette).

B Insurance and re-insurance companies

- DFL No251, Insurance Law of 1931.

- Decree Law No3.538 which creates the Superintendency of Securities and Insurance, Official Gazette December 23, 1980.

National regulations apply equally to national and foreign companies.

(1) According to the Insurance Law, insurance and re-insurance services can be provided only by companies that comply with the two following requirements: (i) be legally constituted in Chile as a corporation with the exclusive purpose of developing this line of business and related activities; and (ii) meet the minimum capital requirements. The Superintendency of securities and Insurance is in charge of approving the establishment of insurance and re-insurance companies.

Re-insurance services can be supplied by insurers or re-insurers established in Chile, that is (i) corporations whose sole purpose is to operate re-insurance, subject to inspections by the Securities and Insurance Supervision Department; and (ii) those foreign re-insurers who are enrolled in the Register of Foreign Re-insurers maintained by the same Department.

(2) The insurance and re-insurance business is divided in two groups: (i) companies that insure goods and property against the risk of loss and damage and credit insurance companies; and (ii) companies that provide personal insurance or that guarantee, within or at the end of a certain term, a capital sum, a paid-up policy, or an income for the insured of his beneficiaries. Insurance and re-insurance companies are not allowed to cover both types of risks, and credit insurance companies must have the sole purpose of covering this type of risk.

Insurance and re-insurance can be bought abroad, with the exception of compulsory insurances which must be contracted with companies established in the Chilean market. Importers and exporters that contract insurance services abroad are subject, in addition to the VAT, to a tax of 20% levied on the insurance premium. Insurance for the transport of exports and imports is exempt from the VAT.

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C Securities

- Law No18.045, Securities Market, Official Gazette October 22, 1981.

National regulations apply equally to national and foreign companies. The security trading of public offering can be carried out by stock exchange brokers or by security dealers operating outside a stock market. Notwithstanding, the trading of shares or securities issued inside the stock exchange must be carried out by stock exchange brokers. Other securities may be traded by brokers and dealers registered in the Superintendency of Securities and Insurance or by banks and financial institutions.

Legal requirements to operate in the securities market in Chile are of a cautious character and correspond to requirements of capital, solvency and liquidity.

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Infrastructure

A Highways, airports and railways

The Concessions Law of the Ministry of Public Works establishes a legal framework for the provision of concessions in highways, airports, and railways, through concession contracts signed after a competitive bidding process. Under this concessions contracts, private companies agree the construction, conservation and management of a national property, being paid by the user (in accordance with the bidding guidelines, the State can guarantee a minimum income). There is no discrimination among foreign and local companies, and the institutions in charge vary for each service.

With respect to airports, certain functions related with air navigation and airports security per se, remain under the responsibility of the General Directorate of Civil Aeronautics (DGAC).

B Ports

The state-owned ports are administrated by the Chilean Port Enterprise EMPORCHI (in 1995, 44% of trade was conducted through public ports). A draft bill to modify the EMPORCHI Law is being discussed in the Congress. Warehousing is provided by EMPORCHI. The remaining auxiliary services in the state-owned ports have already been privatized by grant of concessions by the Ministry of Defense. The government has also established that there will be no further public investment in new ports, leaving the way open to private companies.

Mining

(1) The Constitution of 1980 stipulates that the State is the sole owner of all the mines, independently of who owns the surface land. However, a system of concessions is in place, under which foreigners are allowed to explore for or exploit minerals, and are granted national treatment.

Applications for concessions have to be posted with the Justice of the Peace (i.e. the nearest judge of the mining site). A concession to exploit is valid for an indefinite period, it remains in force as long as the license fee continues to be paid. A concession to explore is valid for two years from the day it is granted, it can be extended for two additional years if the area of land being explored is reduced by 50%.

The State participates in production through two enterprises, Chile's National Copper Corporation (CODELCO), which concentrates mainly on exploitation of copper and molybdenum, and the National Mining Company (ENAMI) which owns two copper processing plants and an electrolytic refinery, and purchases copper, gold and silver from small-scale producers. There are also 27 private Chilean companies, and 17 foreign companies engaged in exploration and 27 in exploitation.

(2) The Ministry of Mines is responsible for mining policy and regulating the sector. It has several advisory bodies: (i) the Chilean Copper Commission (COCHILCO), which advises on mining policy, supervises and evaluates the performance of the state-owned mining enterprises and advises the Foreign Investment Committee on the approval of investment contracts; (ii) the National Service of Geology and Mining (SERNAGEOMIN), which is responsible for the geological survey of Chile, for updating data on mineral resources, for keeping and updating a registry of all mining concessions and the official land registry, and for monitoring safety conditions in the mining sector; and (iii) the Mining Metallurgic Research Center (CIMM), which specializes in applied research for technological development and serves both the state-owned and private companies.

There is no discrimination between private and public enterprises, or between national and foreign investors, and tax treatment is equal to that in other sectors of the economy.

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II. Objective (a) - to promote transparency of regulatory regimes

Chile will:

Short/medium term (1997-2005)

- A draft bill is being discussed in Congress which modifies the regulatory laws for water and sewerage companies in order to promote competition and transparency in operation, as well as to allow an increasing incorporation of private investment, through, among others the partial privatization of the existing State-owned firms. The draft bill also include technical provisions for the sewage treatment, and quality and safety of the service provided, among others.

- A project of Regulation of the Electrical Law of 1982 is being drafted by the Government and is aimed at promoting competition in generation, establishing transparency in the establishment of transmission tolls, improving transparency in the operation of the CDEC and modifying the legislation on the use of water rights (uso de derechos de agua).

- The privatization of the only public energy generation facility (the third one in Chile) has been handled in such a way as to attract new investors, foreign or national in order to create a more competitive market structure. Natural gas brought from Argentina is available in Chile since early this year. This source of energy competes directly with the thermoelectric companies.

- Include competition criteria in the design of a new law for ports and airports, allowing private participation in a competitive environment. The first project refers to the Chilean Port Enterprise EMPORCHI, which is being discussed in the Extraordinary Legislature in Congress and is expected to be ratified in 1997.

- The proposed law is aimed at the privatization and the decentralization of the administration of the state-owned ports. Under the proposed law, nine autonomous companies would be created to replace EMPORCHI. The State would remain as the regulatory body.

- Review all regulatory frameworks to make them more pro-competitive. A Sub-Committee of Under-Secretaries, chaired by the Under-Secretary of Economy, which reports to the Committee of Ministers for the Modernization of the Public Administration, is working in a proposal of reform of the public services regulatory legislation and institutions. A draft bill would be presented to Congress for its approval before the end of 1999.

- A draft bill to modify the General Banking Law was discussed in the Congress, and shall be promptly promulgated by the President. It is aimed at modernizing the banking sector. reforms include the expansion of the scope of banking activities both domestically and internationally, and the adoption of international standards regarding supervision methods. At the domestic level, banks would be allowed to undertake activities such as factoring, securitization, underwriting and brokerage of non-provisional insurances; at the international level, Chilean banks would be allowed to establish branches abroad and to lend money abroad. In addition, the standards laid down in the Basel Agreement regarding capital requirements would be adopted.

- Provide updated deregulation initiatives in Chilean economy and contribute to the APEC world wide web on member economies respective deregulation schemes.

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III. Objective (b) - to eliminate trade and investment distortion arising from domestic regulations

Chile will:

Short/medium/long term (1997-2010)

- The economic regulations currently in force in Chile are not aimed at impeding free and open trade and investment. On the contrary, they are aimed at improving competition and avoiding trade distortions.

- The government constantly reviews and improves its regulatory framework, some important reforms are currently being discussed in Congress.

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