Managing the Fiscal Risks Wrought by PPPs : A Simple Framework and Some Lessons from Chile

Public-private partnerships are used to procure public infrastructure. Despite involving privateinvestors and concessionaires, they impact the public budget like traditional provision and create fiscal risks. Thispaper develops a conceptual framework to assess whether and how public-private partnerships shift risks toconcessionaires and financiers. It uses this framework to describe and assess the Chilean public-private partnershipsprogram. The paper identifies renegotiations as the major source of fiscal risk, which involved additionalinvestments, increasing the cost by about one-third over the original project cost estimates. The 2010 law reform onpublic-private partnerships introduced changes to the renegotiations regime and began the routine use of variableterm contracts. Using contractual data, the analysis finds evidence suggesting that renegotiations fell dramatically.The paper also calculates the realized internal rates of return for 50 highway and airport public-privatepartnerships, using cash flow data for the entire public-private partnerships program, which started in 1991.The average internal rate of return is 6.8 percent, with averages of 9.1 and 3.1 percent for fixed and variable termpublic-private partnerships, respectively. The returns show a large dispersion, which suggests that infrastructureprojects are intrinsically risky and private participation entails significant risk shifting from the budget toconcessionaires and financiers.