BROAD ROADS IN A THIN COUNTRY Infrastructure Concessions in Chile

Abstract

To increase investment in
\n infrastructure, in the early 1990s Chiles government
\n introduced private capital into the transport infrastructure
\n sector, covering roads and highways, bridges, tunnels, and
\n airports. The chosen mechanism: a concession scheme through
\n which private firms would finance and build a given project
\n and then operate the infrastructure for a set of number of
\n years, recovering their investment by collecting tolls from
\n users. Among the lessons learned from the experience: 1) As
\n much as possible, avoid concessioning roads for which there
\n are convenient alternative freeways nearby. 2) Choose the
\n right variable for awarding a concession. Avoid mechanisms
\n that (by promoting large payments to the state or short-term
\n concession periods) encourage high tolls, and if you choose
\n to award a concession to the firm charging the lowest tolls,
\n place a floor and ceiling on possible bids. The floor is to
\n guarantee the concessions financial viability; the ceiling
\n is to prevent inefficient traffic diversions. Ties at either
\n end should be resolved by a second variable, such as the
\n level of transfers between the state and the firm. 3) Allow
\n downward toll flexibility so that the concessionaire can
\n react to unexpectedly low traffic flows, especially for
\n certain types of vehicles. 4) Pay special attention to the
\n tendering mechanism and to the general incentive structure.
\n There are limits to the pure least-present-value-of-revenue
\n (LPVR) auction, but income guarantees do enhance liquidity.
\n In fact, a minimum-income guarantee through an LPVR auction
\n is an instrument for credit enhancement, not income support.
\n Alternatively, some form of financial innovation should be
\n encouraged to make debt service commitments more flexible.
\n 5) If concessions are tendered by traditional methods and
\n income guarantees will be given, cover only a fraction of
\n the concessionaires expected income stream, to reduce the
\n states financial exposure and to improve the incentives to
\n the concessionaire. 6) Make the contracts as complete as
\n possible but allow for later modifications or
\n renegotiations, and include a well-designed dispute
\n resolution mechanism.