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Soft Budgets And Highway Franchising


  • Eduardo Engel
  • Ronald Fischer


  • Alexander Galetovic


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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  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2004. "Soft Budgets And Highway Franchising," Documentos de Trabajo 176, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:176

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    References listed on IDEAS

    1. Alberto Alesina & Guido Tabellini, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 403-414.
    2. J. Luis Guasch & Jean-Jacques Laffont & Stephane Straub, 2003. "Renegotiation of Concession Contracts in Latin America," ESE Discussion Papers 103, Edinburgh School of Economics, University of Edinburgh.
    3. 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.
    4. 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.
    5. 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.
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