Unexploited data on road concessions in Chile, Colombia and Peru show evidence of State opportunistic behaviour as an important factor behind frequent and costly contract renegotiation.

Over the last two decades Latin America has seen considerable private sector investment in transport infrastructure, yet continues to lag behind other developing and developed regions. This is partly due to shortcomings in the road concession programmes that have been implemented, which have generated large construction delays and extra costs for the State. A recent research shows that the most salient feature of these concession contracts to build roads has been how early, how costly and how often they have been renegotiated (Bitran, Nieto-Parra and Robledo, 2013). This study complements previous research analysing the determinants of the renegotiation contracts in Latin America (See for instance Guasch et al., 2007; Engel et al., 2009).

Renegotiation: Often, early and costly

Out of 61 road concession contracts signed between 1993 and 2010 in Chile, Colombia and Peru, 50 of them were renegotiated at least once during the same period. There were more than 540 renegotiations in total and each contract was renegotiated on average around once a year. Renegotiation varied across countries, with Colombia experiencing nearly ten times more renegotiations per concession year than Chile and double as many as Peru.

Among renegotiated concessions, the first change almost always occurred less than three years after the contracts were signed. In the case of Colombia, it occurred on average only one year after that contract was signed (Table 1).

The costs of renegotiations in the three countries included direct fiscal costs worth USD 7 billion (increasing concession’s initial cost by 50%), average increases in concessions’ term of 20%, higher toll prices, greater risks faced by the State and delays in construction deadlines. Colombia alone saw extra fiscal costs from renegotiation worth USD 5.6 billion (i.e., close to three times the initial value of renegotiated concessions) and 131 years added to the term of renegotiated concessions (Figure 1).

The breach between theory and practice

In theory, concessions and public-private partnerships in general offer potential benefits over public works. The private sector’s project screening and competition for the field can reduce the risk of white elephants, improve maintenance of roads and achieve optimal pricing. In addition, they represent a useful tool for States to finance infrastructure projects over many years.

However, the success of concessions in practice requires a clear legal framework, rigorous planning and design and well-equipped institutions in charge of their promotion and supervision. The extent to which countries have met these criteria has been determinant in deterring or allowing frequent renegotiation.

Chile conceived a well-defined legal and contractual framework for concessions in 1991, improved in 1996 and 2010, although the concentration of responsibilities held by the Ministry of Public Works has undermined the independent supervision of contracts. Conversely, Colombia had until 2011 an unclear, unstable and incomplete legal framework for public-private partnerships, coupled with weak institutions and complex, rigid contracts. Finally, Peru established a legal framework exclusive for PPPs in 1996 and boasts flexible contract designs depending on projects’ expected demand.

Reasons to renegotiate: Beyond the usual suspects

Some renegotiation is to be expected in any concession due to the incomplete nature of its contracts, as it is impossible to foresee and consider all contingencies. However, renegotiation in Latin America has been larger and more frequent than what theory and international experience suggest, derived from initial flaws in the concession programmes that have been well-documented by the literature (see OECD, 2011 for a review of this literature). Moreover, frequent renegotiation has been attributed to, on the one hand, new governments trying to correct the initial flaws of concessions or change contract terms they oppose ideologically and, on the other hand, to private firms that have taken advantage of contract and regulatory flaws to secure larger rents.

Our study explores whether frequent renegotiation is associated with opportunistic behaviour by the State in which governments renegotiate on-going concessions to contract additional and complementary works faster, avoiding public contracting regulations, accruing political capital in the short term and transferring the associated costs to future administrations and future users.

The opportunistic State

A vast effort to collect unexploited data was conducted to be able to depart from the usual empirical framework that evaluates the probability of concessions being renegotiated at least once. This data allowed us to analyse recurrent renegotiation in one single concession contract and to explore the factors behind the size and the modes of payment of renegotiations.

In addition to variables designed to capture State opportunistic behaviour, proxy variables measuring the factors of renegotiation usually mentioned in the literature were added to our empirical analysis. The various models used also controlled for country effects and major changes in the legal, institutional or contractual frameworks of concession programs.

Results show that State-led renegotiations that either appended new stretches of road to concession contracts or that added complementary works before elections were (statistically) significantly costlier than other types of renegotiation. Also, the share of renegotiation costs deferred for future payment was significantly higher for State-led renegotiation that took place during governments’ last year in office.

Steep road ahead

Although concession programmes in the three Latin American countries analysed have recently improved, especially in Colombia, the results of this research suggests that policy challenges remain. For instance, PPP agencies in charge of planning projects need to conduct a more rigorous ex-ante evaluation that includes value-for-money analyses. Better accounting practices for public investment in PPPs are needed to prevent political bias towards PPPs. In addition, environmental and expropriation permits and social assessments, including consultation processes with indigenous groups need to be performed more efficiently to avoid frequent delays and extra costs. Finally, contract supervision and regulation could be conducted by an independent institution to avoid conflict of interests.

References

Bitran E., S. Nieto-Parra and J. S. Robledo (2013), “Opening the Black Box of Contract Renegotiations: An Analysis of Road Concessions in Chile, Colombia and Peru”, OECD Development Centre Working Papers 317, OECD Publishing.

Engel E., R. Fischer and A. Galetovic (2009), “Soft Budgets and Renegotiations in Public-Private Partnerships”, NBER Working Papers 15300, National Bureau of Economic Research.

Guasch J. L., J. J. Laffont and S. Straub (2007), “Concessions of Infrastructure in Latin America: Government-led Renegotiation”, Journal of Applied Econometrics, Volume 22, Issue 7, pp. 1267–1294, December.

OECD (2011), Latin American Economic Outlook 2012, OECD Development Centre, OECD Publishing, Paris.