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 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.
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Bibliographic InfoPaper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm417.
Date of creation: 28 Jul 2004
Date of revision:
build-operate-and-transfer (BOT); concessions; cost-of-funds; flexibility; franchising; government subsidies; present-value-of-revenue (PVR); regulation; renegotiation;
Other versions of this item:
- Eduardo Engel & Alexander Galetovic & Ronald Fischer, 2003. "Privatizing Highways in Latin America: is it Possible to Fix What Went Wrong?," Documentos de Trabajo 163, Centro de Economía Aplicada, Universidad de Chile.
- 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.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-18 (All new papers)
- NEP-COM-2004-07-18 (Industrial Competition)
- NEP-LAM-2004-07-18 (Central & South America)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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American Economic Review,
American Economic Association, vol. 87(2), pages 68-72, May.
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IREA Working Papers
200706, University of Barcelona, Research Institute of Applied Economics, revised Mar 2007.
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- 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.
- World Bank, 2007. "Chile : Investment Climate Assessment, Volume 2. Background Chapters," World Bank Other Operational Studies 7716, The World Bank.
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