Distribution of Risk, Regulation and Collaboration: Key Factors for the Future of Chile’s Construction Industry

The construction industry has historically been an economic and social barometer. Given its labour-intensive nature and its contribution to the Gross Domestic Product, the strength of an economy – or its recovery – can generally be identified by examining the increase in construction projects, which generates a rapid recovery in employment and growth in consumption.

In the case of Chile, the COVID-19 pandemic, as in most countries worldwide, resulted in a significant increase in the cost of construction materials due to supply chain restrictions and the need for social distancing for the use of direct labour. However, once the restrictions were lifted, these costs did not fall back to pre-pandemic levels, as originally anticipated.

From a housing construction perspective, the aforementioned situation created a new structural foundation that, as a social consequence, resulted in a loss of opportunities for home ownership, particularly for the middle class, which currently requires 11.4 years of income to purchase a property in Chile, compared to 3.9 years in 2009. In addition, financial institutions have increased their requirements, thereby reducing widespread access to financing. These circumstances have led to market concentration through family offices and institutional investors, who acquire units en masse for subsequent rental.

For this reason, the Chilean Chamber of Construction (CChC) has been in constant negotiations with recent governments to reduce final sale prices. This has resulted in two very important laws addressing the issue: Law 21.450 of 2022 (Law on Social Integration in Urban Planning, Land Management and Emergency Housing Plan) and Law 21.748 of 2025 (Mortgage Interest Rate Subsidy Law for the Acquisition of New Housing).

Law 21.450’s main objective is to promote urban social integration, preventing territorial segregation and facilitating land management through the introduction of mechanisms for making public land available and accelerating housing projects. This law provides the regulatory framework for the so-called Housing Emergency Plan (2022–2025). Its focus is on increasing the supply of social housing through properly co-ordinated intersectoral work.

For its part, Law 21.748 establishes a framework for more direct intervention through state subsidies. Given the large stock of housing available to the middle class, this law creates a temporary mechanism through which the state subsidises 0.6% (60 basis points) of the commercial mortgage rate for the purchase of new homes valued at less than 4,000 Chilean Development Units (approximately USD170,000). This mechanism ends once 50,000 homes have been subsidised. However, the possibility of increasing the number of units eligible for the subsidy is currently under study.

The effect of both laws has been positive, as the stock of new housing has been gradually reduced. However, this does not resolve the existing problem: that housing prices are rising much faster than people’s wages, demonstrating that part of the problem may also be related to land management and other structural conditions within the industry.

Concessions model

Chile has long enjoyed a solid reputation in terms of public infrastructure. However, today it faces the challenge of adapting its contractual models to a reality where risk is no longer just technical, but also regulatory, financial and operational. This is where it is important to distinguish between two worlds that are often mistakenly analysed as one: concessions (PPPs) and traditional public works contracts. The concession model has a history spanning over 30 years, with its initial legal framework established in Decree with Force of Law MOP 164 of 1991 (compiled in 1996 through Decree with Force of Law MOP 900). This was later supplemented by Supreme Decree MOP 956 of 1997 (Concession Regulations), Law 20.410 of 2010, which refined the original system, and Law 21.044 of 2017, which created the General Directorate of Concessions, a specialised agency under the Ministry of Public Works.

While the concession model is one of the most modern and comprehensive in Latin America, almost ten years have passed since its last major reform, and it currently faces significant challenges related to permit management, increasing litigation surrounding projects, ensuring economic equilibrium through predictable cash flow, stricter environmental requirements, regulatory uncertainty and greater sociopolitical complexity – situations that have demonstrated a high level of criticism in recent years.

Therefore, the current problem with the Chilean system does not appear to be the absence of a legal framework for concessions, but rather the growing difficulty in executing projects within predictable timeframes. In particular, it is important to consider that, within the aforementioned critical factors of the concession model, permit management and cash flow stand out. Airport projects have demonstrated how delays in authorisations, regulatory changes or uncertainty in projected revenues can strain the economic equilibrium of the contract. It is no coincidence that several of these controversies have ended up before the so-called “Technical Panel of Concessions”, an organisation created by Law 20.410 of 2010.

Concessions Technical Panel

The Concessions Technical Panel is an institution within the Chilean system that bears some resemblance to a Dispute Review Board. While this body issues non-binding recommendations that, by law, are limited to technical and economic disputes (given that controversies in this sector are rather multidimensional), a blurred line has recently been observed regarding its pronouncements on contractual matters.

In terms of figures, over the last ten years, the number of disputes presented to the Technical Panel has not decreased but rather has remained constant at an average of ten new controversies per year nationwide, except in 2023, when the number was higher, possibly due to problems associated with COVID-19.

In the last decade, the recommended percentage of payment in favour of the concessionaires has been less than 10% of the amounts claimed. However, currently, concessionaires must appear before the Technical Panel if they wish to later resort to arbitration. This requirement suggests that the Panel’s decisions are driven by strategic expediency rather than a genuine belief in its benefits as a mechanism for early conflict resolution.

In contrast, the regulatory framework for public works contracts financed with public funds has been updated in recent years. The core regulations are contained in Supreme Decree 75 MOP of 2004 (Public Works Contract Regulations), which was subsequently amended 20 years later by Supreme Decree 156 MOP (2024) and Supreme Decree 150 MOP (2026). These latter legal instruments introduced significant improvements to specific aspects of the Regulations, such as pro forma values, related companies, penalties, subcontracts, work increases and overall system transparency.

Given that the 2026 reform is very recent, a reliable evaluation of its actual results in terms of reducing conflict is not yet available. However, prior to this latest amendment, it is worth noting that the critical problem in public works contracting has been an inequitable distribution of risks from the outset. Indeed, the state retains exorbitant powers in substantive matters, while the contractor assumes broad risks with little room for manoeuvre.

Added to this is another factor: the inability to execute the budget. Late payments, reallocations and fiscal restrictions end up shifting financial risks onto the contractor that are not their responsibility. The result is predictable: less interest in participating and more disputes during execution, which are resolved in the courts instead of using the arbitration system, unlike in the concessionary regime. In this sense, the modifications introduced are a step in the right direction, addressing difficulties that have historically caused problems that were ultimately resolved in court.

As can be seen, applying the same analytical logic to the mentioned sectors would be a mistake. Their bottlenecks are different and, therefore, require different solutions.

Opportunities for improvement

In the housing sector, a thorough review of existing structural conditions is required to create a system capable of developing projects more efficiently and at prices affordable for most of the population. This likely implies greater access to financing for middle and vulnerable sectors, increased bank support for construction contractors and, undoubtedly, a new territorial management policy.

Meanwhile, in the world of concessions, the focus should be on reducing regulatory uncertainty and improving the predictability of cash flows. This involves strengthening institutional co-ordination regarding permits, establishing clearer rules for reviewing concessionaires’ revenues, and introducing preventative mechanisms that allow for timely adjustments without escalating conflicts.

Finally, in the case of public works, the challenge is to rebalance the contractual relationship. This is not about weakening state guarantees but rather distributing risks more rationally. A contractor cannot manage what they do not control. If the system insists on transferring those risks, the consequence will remain the same: less competition and higher final costs for the state.

In this latter case, a historic opportunity arises: to incorporate some of the best practices of the concessions system into public works contracts. In particular, to extend the Technical Panel model, in a clearly improved version, to traditional contracts. Comparative experience shows that early dispute resolution methods, even if not presented in their standing form, significantly reduce the time and costs of conflicts, preventing their escalation to lengthy and expensive arbitrations.

Conclusions

In summary, Chile is experiencing a slow regulatory update, but progress is being made in modernising the industry and untangling some historically problematic issues. However, much work remains to be done.

In particular, a shift towards systems that prioritise early risk and dispute management is needed, with better inter-institutional co-ordination, an appropriate risk balance, clear and efficient compensation mechanisms aimed at ensuring the economic equilibrium of contracts, and a change of approach from confrontation to collaboration.

The above implies the challenge of making the existing framework flexible, predictable and efficient enough to respond to an increasingly complex environment, as well as implementing a global policy to strengthen industry actors in matters of collaborative management.