Water legislation in Chile: the need for reform

Practical Law UK Articles 9-547-7926 (Approx. 7 pages)

Water legislation in Chile: the need for reform

by José Ignacio Morán, Urrutia & Cía

Chilean water legislation

Water Code of 1981 (Water Code). The Water Code is currently in force and is the main regulation governing terrestrial water and water rights in Chile. Water is "national property for public use" (Water Code). However, the Water Code grants permanent and transferable water rights to individuals (which are protected by property security) to achieve an efficient distribution of water through market transactions of water rights. According to experts, market mechanisms are adequate to achieve an efficient allocation of water, as they (Donoso, Guillermo, "Water use Rights Markets and Water Allocation: the Chilean Case", Expo Zaragoza Water Economic and Financing (2008)):

Secure transfer of water from low value to higher value activities.
Put the burden of information gathering on water users. This prevents problems of unequal information that are common in centrally planned situations.

Water rights can be used for any activity that the right holder determines. In addition, the Water Code eliminated the water use preferential lists that were established in the Water Codes of 1951 and 1967 (that is, a list prioritising certain water uses such as sanitation, irrigation, industrial, and so on). Currently, if two applications are presented simultaneously, the issue is solved through a judicial auction procedure. Under the current Water Code, water rights are granted in perpetuity and do not include a "use it or lose it" condition (Donoso, Guillermo, "The Evolution of Water Markets in Chile" in Water Trading and Global Water Scarcity: International perspectives, (2011, RFF. Press.), pp. 111-129).

The Water Code established that water rights are transferable, to facilitate water rights markets as a water allocation system. The water market is based on the transactions of buyers and sellers. Under this mechanism, water is reallocated through the exchange of some kind of property right (water rights), either for a limited time period (lease) or in perpetuity (sale) (Donoso, Guillermo, " Water use Rights Markets and Water Allocation: the Chilean Case" , Expo Zaragoza Water Economic and Financing (2008)). Although private water rights existed in Chile before 1981, the preceding Water Codes limited the formation and operation of efficient water markets. The current Water Code also reduced the state's involvement in water resources administration and increased the management influence of water rights holders (which are structured in different types of water user associations) (Donoso, Guillermo, "The Evolution of Water Markets in Chile" in Water Trading and Global Water Scarcity: International perspectives, (2011, RFF. Press.), pp. 111-129).

DGA. The Directorate General of Water (Dirección General de Aguas) (DGA), part of the Ministry of Public Works, is the most important public agency. It has overall responsibility for water use planning and for the investigation, protection and development of water resources and basins. Among other things, the DGA is responsible for granting new water rights, for the supervision of water users and for the approval of all major hydraulic works.

Water associations. Water rights holders are in charge of water management (Water Code). Users have largely managed water resources in Chile for about 200 years and there are thousands of water user associations. The Water Code:

Grants water rights to private individuals, protecting these water rights with the constitutional right of private property.
Gives these individuals the power to manage and distribute the water to which they are entitled, as well as the authority to settle disputes that may arise among them.

Under the Water Code's regulations, the state's role in the management of water resources is very limited. The DGA can only intervene in very exceptional circumstances and for limited periods of time (for example, in cases of extreme drought, the DGA can interfere in water distribution for a non-renewable period of six months). In addition, the DGA cannot interfere in water rights transactions between individuals. Chilean legislation recognises three main types of water user association:

Water Communities.
Canal User Associations.
Vigilance Committees.

Water Communities and Canal User Associations are formal groups of users that share a common artificial canal. Vigilance Committees are responsible for administering water and allocating water to different users of a specific basin, river or stream. Vigilance Committees are formed by all Water Communities, Canal User Associations and all users of the same river or basin (Donoso, Guillermo, "The Evolution of Water Markets in Chile" in Water Trading and Global Water Scarcity: International perspectives, (2011, RFF. Press.), pp. 111-129).

Improving current legislation: World Bank report

Many commentators believe that the current water legislation in Chile needs improvement.

In 2011, the former government requested the World Bank to undertake a report analysing the management of water resources in Chile (World Bank, "Chile: Analysis of water resources management" (2011)). This report identified various issues related to legal aspects and management tools that should be addressed by Chilean authorities to improve water legislation. This is probably the most complete report in this field to date. Some of the most important recommendations from the World Bank's experts are the following:

Improve the protection of water for environmental purposes. Until the 1990s, environmental and water policies had not paid much attention to protecting water for environmental purposes. This changed progressively with the introduction and perfection of the System of Environmental Impact Assessment (SEIA) in 1994, and the implementation of the requirement of minimum ecological flow (that is, the minimum flow that must pass downstream to maintain the basin's biodiversity) in the establishment of new water rights from 2005. However, the SEIA was introduced too late. In effect, in the 1990s, all the water from the majority of the rivers in the northern and central parts of Chile was already assigned. Therefore, these instruments were not applied to the water rights that were granted before 2005.
Strengthen the DGA. As the main public body in charge of water management, the DGA is responsible for executing a large number of tasks. Since water-related issues are increasingly complex, it is necessary to strengthen its capacities and allocate more resources, to allow this institution to carry out its functions properly.
Strengthen water user associations. Among the water user associations, vigilance committees are the most important ones. Despite this, vigilance committees are inadequately organised and have a lack of resources. In addition, less than half of the vigilance committees are registered at the DGA's Public Archives. In many basins there is not a legally structured vigilance committee. Where they do exist, they often do not represent all users and therefore there is very little participation in the decision making process.
Improve information and communication systems. Although there are many public studies, reports and data relating to Chilean water resources, there are still some serious gaps in the quality and accessibility of this information that need to be closed. Information about quantity and quality of surface and underground water is limited.
Develop integrated watershed management and encourage stakeholder participation. The DGA is in charge of water resource planning. However, this is restricted to determining the availability of water in order to grant new water rights and declare areas of restriction or prohibition.

Integrated watershed management is urgently needed. It is crucial to provide all stakeholders with the opportunity to get involved in the basin management.

Improve conflict resolution. It is essential to have a proper system of conflict resolution both:
- given the degree of conflict between water users themselves, and between water users and the DGA;
- considering the fact that this conflict could increase in the future due to the lack of this resource.

A large number of these conflicts reach ordinary courts that are not technically qualified to resolve these matters.

Improve water rights markets. Water markets have helped to reallocate water to higher value uses, mitigate the impacts of droughts, and allow the use of water in basins where water resources were already distributed. Although for several years the markets were active only in a small number of basins, a recent analysis of data from the Public Registry of Water Rights indicates that market activity has increased significantly. However, the analysis also showed a wide dispersion of prices which is probably a reflection of the lack of information and market transparency.
Improve the public registry of water rights. The Public Registry of Water Rights, which is managed by the DGA, is the main information system on water resources. This registry is intended to provide the DGA with the necessary information about water rights to enable it to fulfil its functions of planning and managing water resources.
However, it is difficult to prepare and update this record. The record is incomplete because many water rights do not have titles and most of the titles of water rights do not contain the minimum information required by the Water Code to enter into the registry. In addition, the public registry is not updated because the Conservative of Real Estate (Conservador de Bienes Raíces) (that is, the institutions in charge of maintaining a registry of real estate property including water rights) and users have not co-operated enough to report to the DGA the transfer of water rights.

Government reform proposals

Overview of proposals. Parliament is debating more than 20 bills that aim to modify the current Water Code. Some of these seek to address many of the aspects described above, for example to improve the organisation and structure of the DGA, or to enhance water information systems, but in general none of them intend to establish a significant change in Chilean water legislation.

However, on 21 May 2014, in her annual speech to the Parliament, the President of Chile announced a major reform in water legislation (see below). The Executive aims to introduce this modification through amendments to one of the bills that the Parliament is currently debating. As at September 2014, the government has not established these suggestions formally, but some general ideas were delivered by the Presidential Executive Officer for Water Resources through academic seminars (Academic Seminar organised by the Faculty of Law of the Pontifical University of Chile, " Changes in the Water Legislation Regime", 20 August 2014).

According to the Presidential Executive Officer for Water Resources, the most important aspects of the proposal are:

A constitutional change.
A modification to the Water Code.

The constitutional reform aims to establish "water" as a national asset for public use, which according to the Civil Code belongs to all citizens of the nation.

Main changes. The main changes to the Water Code that the government is proposing are the following:

Establishing a limited duration of water rights.
Incorporating grounds for termination and forfeiture of water rights.
Introducing a charging fee to be paid by water rights holders.
Instituting some restrictions to avoid the concentration of water rights in a sole holder.
Establishing some priorities in granting water rights (for example, water rights for human consumption must take precedence over those destined to supply mining projects). This priority should also be considered for those water rights that are already granted in some exceptional cases.
Ending the separation between land and water rights. Under the current legislation, water rights are not attached to the land. This is why, for example, it is possible to freely transfer a water right separately from the land.
Water rights should be granted for a specific use in a specific place, and for a specific activity. If the use changes, the DGA can adjust the original conditions of the water right.
To sell water rights it will be necessary to obtain the public authority's prior authorisation.

Benefits/disadvantages of government reform proposals

It is too early to analyse the effects of these measures and draw conclusions, but some comments can be made:

Water is already legally recognised as a national asset for public use in the Chilean Civil Code an in the Water Code. It is unclear why it would be necessary to pass a reform of the constitution to introduce a concept that is already legally established. Perhaps the government believes that by doing this the state will be able to expropriate water rights, but the state already has the power to do so. It seems there is no real necessity to make this constitutional amendment.
The amendments to the Water Code described above imply a radical change in the current legislation. Although some of the modifications seem appropriate, the measures proposed do not generally focus on addressing the issues that are crucial when it comes to improving water legislation (see above, Improving current legislation).

Some of the amendments intended by the government aim to end speculation by water rights holders (that is, when holders do not use their water, but wait for the right moment to sell their water rights to make an economic gain) and the misuse of water rights, for example by:

Instituting certain restrictions to avoid the concentration of water rights in a sole holder.
Incorporating grounds for termination and forfeiture of water rights.
Introducing a fee to be paid by water rights holders.

These measures could have a negative impact on the economy, as they affect private property and reduce stability. However, they should be useful in ending speculation and bad practices.

Other proposals, particularly those listed in the last four bullet points listed above (see above, Main changes), seek to end the reallocation of water through water markets. Two main principles must be present for a water right market to exist:

Liberty of water use in any productive activity.
Free transfer of water rights.

Clearly, the measures in the last four bullet points listed above (see above, Main changes) limit both of these principles.

However, to eliminate water rights markets does not seem to be the best measure. Experts agree that this mechanism has allowed important economic progress in Chile over the last decades. In addition, commentators consider that water rights markets provide opportunities for water resources to be allocated among competing uses. Indeed, many economists support the use of tradable water rights as the most efficient method for distributing limited water resources among alternative economic uses. A private market in tradable water rights would (Ríos, Mónica, " The Market of Water Rights in Chile: Major Issues" in Latin American Journals of Economics, Year 32, Nº 97 (1995, Economics Institute, Pontifical Catholic University of Chile), pp. 317-345):

Maximise the economic value of the resource.
Help to reduce costly public infrastructure investment.
Foster private investment in irrigation.

Water rights markets in Chile do not work perfectly. It is necessary to improve these mechanisms by introducing better information systems and more regulation. The lack of transparency of transactions and market informality are key issues that should be addressed. The costs connected with a transaction may rise due to the complex process of finding potentially appropriate buyers or sellers. In addition, the inequality in access to information among market participants has increased, which may lead to an unequal redistribution of water.

Some of the measures proposed by the government are well targeted. However, it is erroneous to promote constitutional and significant legal reforms without first establishing a clear public policy on water resources supported by national and international experts, with citizen participation and also with political consensus.

A public policy in this matter must be oriented towards:

Improving the protection of water requirements for ecosystems and associated services.
Strengthening the DGA.
Strengthening water user associations.
Improving information and communication systems.
Developing integrated watershed management and encouraging the participation of stakeholders.
Improving conflict resolution.
Improving water rights markets.
Improving the public registry of water rights.

Contributor profile

José Ignacio Morán, Senior Associate

Urrutia & Cía.

T +56 2 22499 5919 
F +56 2 22335 1842
E [email protected]
W www.urrutia.cl

Professional qualifications. Lawyer, Chile

Areas of practice. Water; environmental and natural resources.

Recent transactions

Acting for an international energy company in relation to environmental and water issues of a thermoelectric project.
Advising an important local Bank in water rights issues regarding a project finance of a hydro-electrical project.
Counseling an energy company in creating a legal strategy for using its water rights in a hydro-electrical project.

Non-professional qualifications. LL.M, The University of Sydney, Australia; Law Degree, Pontifical Catholic University of Chile.

Languages. Spanish, English

Professional associations/memberships. Member of the Chilean Bar Association.

Publications. "The Miner's Water", Environmental Justice Journal, 2011; "Mining Business: Chile Offers Economic Stability and a Clear Legal Framework" , China Business and Law Journal, 2011.

Water legislation in Chile: the need for reform | Practical Law