Privatizing Highways in Latin America: Is It Possible to Fix What Went Wrong? by Eduardo Engel,

This paper reviews the Latin American experience with highway privatization during the last decade. Using 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, our review of the evidence suggests that pervasive contract renegotiations implied that many of the standard benefits of privatization did not materialize. We argue that this 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. Fixed term franchises increase demand risk and create a demand for guarantees and contract renegotiations. We also extend 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. We find 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.