Privatizing Highways in Latin America: Is it Possible to Fix What Went Wrong?

Eduardo Engel, Ronald Fischer and Alexander Galetovic ()
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Alexander Galetovic: Universidad de Chili, Center of Applied Economics (CEA)

Yale School of Management Working Papers from Yale School of Management

Abstract: This paper reviews the Latin American experience with highway privatization during the last decade. Based on evidence from Argentina, Colombia and Chile, we find that private financing of new highways freed up fewer public resources than expected because public funds were often diverted to bail out franchise holders. Furthermore, many of the standard benefits of privatization did not materialize because of pervasive contract renegotiations. We argue that the disappointing performance of highway privatization in Latin America was due to two fundamental design flaws. First, countries followed a "privatize now, regulate later" approach. Second, most concessions were awarded as a fixed-term franchise, thereby creating a demand for guarantees and contract renegotiations. This paper also extends our previous work on formal models of highway privatization. We relax the self-financing constraint which ruled out the public provision of highways by assumption, and show that whenever the privatization of a highway is optimal, government transfers are undesirable. Alternatively, if government transfers are optimal, it is always the case that the full public provision of the highway should be preferred over privatization. We also model the role of flexibility and opportunistic behavior in highway concession contracts, and show that, by contrast with its fixed term counterpart, a flexible term franchise provides flexibility without inducing opportunistic behavior.

Keywords: build-operate-and-transfer (BOT); concessions; cost-of-funds; flexibility; franchising; government subsidies; present-value-of-revenue (PVR); regulation; renegotiation (search for similar items in EconPapers)
JEL-codes: H21 L51 L91 (search for similar items in EconPapers)
Date: 2004-07-28
New Economics Papers: this item is included in nep-com and nep-lam
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Related works:
Working Paper: Privatizing Highways in Latin America: Is It Possible to Fix What Went Wrong? (2003)
Working Paper: Privatizing Highways in Latin America: is it Possible to Fix What Went Wrong? (2003)
Working Paper: Privatizing Highways in Latin America: Is It Possible to Fix What Went Wrong? (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm417

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