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

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  • Eduardo Engel
  • Alexander Galetovic
  • Ronald Fischer

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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 assump-tion, 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 con-trast with its fixed term counterpart, a flexible term franchise provides flexibility without inducing opportunistic behavior.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120030805165539.pdf
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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 163.

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Date of creation: 2003
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Handle: RePEc:edj:ceauch:163

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  1. Estache, Antonio & Carbajo, Jose C. & de Rus, Gines, 1999. "Argentina's transport privatization and re-regulation : ups and downs of a daring decade-long experience," Policy Research Working Paper Series 2249, The World Bank.
  2. Schwartz, Warren F & Sykes, Alan O, 2002. "The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 31(1), pages S179-204, January.
  3. Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 1997. "Highway Franchising: Pitfalls and Opportunities," American Economic Review, American Economic Association, vol. 87(2), pages 68-72, May.
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Cited by:
  1. Brenck, Andreas & Beckers, Thorsten & Heinrich, Maria & von Hirschhausen, Christian, 2005. "Public-private partnerships in new EU member countries of Central and Eastern Europe: An economic analysis with case studies from the highway sector," EIB Papers 10/2005, European Investment Bank, Economics Department.
  2. Daniel Albalate & Germa Bel, 2007. "Regulating Concessions of Toll Motorways, An Empirical Study on Fixed vs. Variable Term Contracts," IREA Working Papers 200706, University of Barcelona, Research Institute of Applied Economics, revised Mar 2007.
  3. World Bank, 2007. "Chile : Investment Climate Assessment, Volume 2. Background Chapters," World Bank Other Operational Studies 7716, The World Bank.
  4. Montoya, Miguel A. & Trillas, Francesc, 2007. "The measurement of the independence of telecommunications regulatory agencies in Latin America and the Caribbean," Utilities Policy, Elsevier, vol. 15(3), pages 182-190, September.
  5. World Bank, 2007. "Chile : Investment Climate Assessment, Volume 1. Executive Summary and Policy Recommendations," World Bank Other Operational Studies 7695, The World Bank.

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