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Infraestructure Franchising and Government Guarantees

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Author Info

  • Eduardo Engel

    ()

  • Ronald Fischer

    ()

  • Alexander Galetovic

    ()

Abstract

Government guarantees for private infrastructure projects reduce the incentives of firms to perform efficiently, weaken the incentives to screen projects for white elephants, and shift government obligations to future periods. Thus the uses of guarantees needs to be limited, and they need to be carefully designed. Franchising schemes should in principle assign risk to the parties best able to manage and control them. The mechanisms by which contracts are awarded should be simple, so that possibilities for evaluator subjectivity are reduced, the award process remains as transparent as possible, and the likelihood of having to renegotiate is minimized. Infrastructure franchises have usually been awarded on a fixed-terms basis. Such contracts expose franchise holders to considerable demand risk, which investors are often unwilling to assume without government guarantees. These contacts are also inflexible, since it is difficult to determine a fair level of compensation to the franchise holder if the contract is terminated early o modified. Under a alternative mechanism, the franchise is awarded to the firm that asks for the least present value of use fee revenue for a given tariff structure, and the franchise ends when the present value of user fee revenues is equal to the franchise holder's bid. Such contracts reduce the demand risk borne by the franchise holder (and the concomitant demand for governments guarantees). They also make fair compensation of franchise holders in the event of early termination straight-forward, since the level of fair compensation is equal to the revenue remaining to be collected.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 29.

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Date of creation: 1998
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Handle: RePEc:edj:ceauch:29

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Web page: http://www.dii.uchile.cl/cea/
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Cited by:
  1. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Highway Franchising and Real Estate Values," Cowles Foundation Discussion Papers 1354, Cowles Foundation for Research in Economics, Yale University.
  3. Engel Eduardo M & Fischer Ronald & Galetovic Alexander, 2004. "Toll Competition Among Congested Roads," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-21, March.
  4. Julio Cesar Alonso & Israel Fainboim Yaker & Carlos Jorge Rodriguez & Juan Benavides, 2001. "Participación privada en proyectos de infraestructura y determinantes de los esquemas contractuales adoptados: El caso colombiano," Research Department Publications 3111, Inter-American Development Bank, Research Department.
  5. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2006. "Privatizing Highways in the United States," Review of Industrial Organization, Springer, vol. 29(1), pages 27-53, September.
  6. Irwin, Timothy & Klein, Michael & Perry, Guillermo E. & Thobani, Mateen, 1999. "Managing Government Exposure to Private Infrastructure Risks," World Bank Research Observer, World Bank Group, vol. 14(2), pages 229-45, August.
  7. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Highway Franchising and Real Estate Values," Working Papers 840, Economic Growth Center, Yale University.

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