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# **Box 3. EDI Chile (Electronic Data Interchange in Chile)**

The electronic data interchange system was developed to transfer information between different entities and businesses through electronic means, and to use computers to send, read, select, store, and respond to messages and information requests. In the case of EDT Chile, common norms and standards set by the UN/EDIFACT (United Nations Electronic Data Interchange for Administrators, Commerce and Transport) are used, and a value added network (VAN-EDI) has been set up to facilitate the process, providing security and compatibility among users of the service. Four companies already offer VAN.EDI services in Chile (Easy Mail, Edibank, Inn, and Transaxion). through them, it is possible to exchange inforrnation; send, reply to, and modify invoices, payments, and purchase orders; transfer funds; etc. Edibank is owned by cham'bers of commerce, commercial banks, and AFPs.

For the Chilean pension system, EDI could prove advantageous in the following areas: (i) collections, (ii) management of funds, (iii) transfer of information and accounts among AFPs, (iv) consultations with and notifications to employers, (v) transfer of annuities and payments, and (vi) the return of invalid voluntary contributions. The use of EDI is expected to reduce time and administrative costs in all areas for AFPs and employers. Collections will be done through a single form (one From each employer) and funds will be transferred electronically to each AFPs bank account. The management of funds, the purchase or sale of securities, etc., will also be done on-line, thus saving time and money for AFPs and commercial and investment banks. EDI will also allow for the transfer of accounts among AFPs without the need to physically exchange files, therefore diminishing the possibility of losing information and time. Other benefits include electronically based reporting and the ability to provide additional information to the superintendency using preapproved formats, which will facilitate its supervisory capabilities. The expected total cost reductions are significant despite the reduced number of employers that will have the initial capability to use EDI. In Chile, only 2,000 of the 200,000 employers are expected to use EDI.

# 7. **Regulatory Compliance and Reporting**

81. The costs of reporting to the supervisory agency depend on the frequency, quantity, and complexity of the reports required with respect to benefits, the investment portfolio, and financial statements and accounts. Real time systems of control and off-sight supervision of investment portfolios are also expensive. Thus, part of the administrative work required of a pension management company will be fixed by the reporting standards. Since this is a fixed cost, it generates ecornomies of scale. Given the implications of scale economies in small countries, supervisors in small countries should be particularly careful to determine whether each required report is justified.

82. In small countries, where imperfections in the domestic equity market are more likely, regulations relating to minimum capital are more likely to generate a fixed cost. The conventional justification for requiring minimum capital from trustee pension management companies is to ensure their commitment to the market. However, the minimum capital that is justified may be much smaller if collection is separate and processing is subcontracted than if pension services are vertically integrated. Thus, this aspect of prudential regulation design deserves special attention in the small country case and is not independent of other aspects of pension reform.

83. The scale economies of many types of costs also depend on the type of regulation to which the pension management companies are subject. In Chile, replacing the detailed regulation imposed by the superintendency with modem supervisory approaches, such as focusing on the quality of the internal control system rather than on each operation, is thought to have reduced personnel needs by more than 60 percent. Hence, the impact on scale economies is clear.