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Soft Budgets And Highway Franchising

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  • Eduardo Engel
  • Ronald Fischer

    ()

  • Alexander Galetovic

Abstract

Latin American governments progressively substituted build–operate–and–transfer (BOT) contracts for government–provided highways during the nineties. Because under BOT a private franchise holder finances and operates the road in exchange for tolls, it is often claimed that BOT represents a privatization of highways. We argue that, as currently applied, the BOT model is an imperfect and incomplete privatization, because the franchise holders’ budget constraint has been soft, with losses being shifted to tax payers via minimum income guarantees and contract renegotiations. Soft budget constraints are inconsistent with the standard arguments in favor of BOT contracts and call into question their avowed advantages. Moreover, both renegotiations and minimum income guarantees allow governments to finance current expenditures with future tax receipts, sidestepping the normal budgetary process. We propose various changes to the current model aimed at correcting its defects. First, franchises should be awarded through Present-Value-of-Revenue auctions rather than fixed-term franchises. Second, the agency in charge of monitoring contract compliance and regulating franchises should differ from the agency that plans and auctions projects. Third, franchises should be subject to hard budget constraints, so that both profits and losses are privatized. Key words: build-operate-and-transfer (BOT), concessions, cost-of-funds, franchising, government subsidies, present-value- of-revenue (PVR), regulation, renegotiation.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 176.

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Date of creation: 2004
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Handle: RePEc:edj:ceauch:176

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  1. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  2. Lisa J. Cameron, 2000. "Limiting Buyer Discretion: Effects on Performance and Price in Long-Term Contracts," American Economic Review, American Economic Association, vol. 90(1), pages 265-281, March.
  3. Guasch, J. Luis & Laffont, Jean-Jacques & Straub, Stephane, 2003. "Renegotiation of concession contracts in Latin America," Policy Research Working Paper Series 3011, The World Bank.
  4. 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, vol. 31(1), pages S179-204, January.
  5. 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.
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