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

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Listed:
  • 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.

Suggested Citation

  • 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.
  • Handle: RePEc:edj:ceauch:163
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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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    References listed on IDEAS

    as
    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, vol. 31(1), pages 179-204, 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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    Citations

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    Cited by:

    1. Engel,Eduardo & Galetovic Potsch,Alexander, 2014. "Urban transport : can public-private partnerships work ?," Policy Research Working Paper Series 6873, The World Bank.
    2. 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.
    3. 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.
    4. Rouhani, Omid M. & Niemeier, Debbie & Knittel, Christopher R. & Madani, Kaveh, 2013. "Integrated modeling framework for leasing urban roads: A case study of Fresno, California," Transportation Research Part B: Methodological, Elsevier, vol. 48(C), pages 17-30.
    5. Albalate, Daniel & Bel, Germà, 2009. "Regulating concessions of toll motorways: An empirical study on fixed vs. variable term contracts," Transportation Research Part A: Policy and Practice, Elsevier, vol. 43(2), pages 219-229, February.
    6. World Bank, 2007. "Chile : Investment Climate Assessment, Volume 1. Executive Summary and Policy Recommendations," World Bank Other Operational Studies 7695, The World Bank.
    7. World Bank, 2007. "Chile : Investment Climate Assessment, Volume 2. Background Chapters," World Bank Other Operational Studies 7716, The World Bank.
    8. Beria, Paolo & Ramella, Francesco & Laurino, Antonio, 2015. "Motorways economic regulation: A worldwide survey," Transport Policy, Elsevier, vol. 41(C), pages 23-32.

    More about this item

    JEL classification:

    • 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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