Privatizing Highways in Latin America: is it Possible to Fix What Went Wrong?
AbstractThis 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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Bibliographic InfoPaper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 163.
Date of creation: 2003
Date of revision:
Other versions of this item:
- Eduardo M.R.A. Engel & Ronald Fischer & Alexander Galetovic, 2003. "Privatizing Highways in Latin America: Is It Possible to Fix What Went Wrong?," Working Papers 866, Economic Growth Center, Yale University.
- Eduardo M. Engel & Ronald D. Fischer & Alexander Galetovic, 2004. "Privatizing Highways in Latin America: Is it Possible to Fix What Went Wrong?," Yale School of Management Working Papers ysm417, Yale School of Management.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
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