Luis Guash Granting and Infrastructure Concessions

8/2/2019 Luis Guash Granting and Infrastructure Concessions

1/243

(ComentarioCuadrodetexto28816)


2/243

WBIDEVELOPMENTSTUDIES

GrantingandRenegotiatingInfrastructureConcessions

DoingitRight

J.LuisGuaschTheWorldBankWashington,D.C.


3/243

Copyright2004TheInternationalBankforReconstructionandDevelopment/THEWORLDBANK1818HStreet,N.W.Washington,D.C.20433,U.S.A.

AllrightsreservedManufacturedintheUnitedStatesofAmericaFirstprintingJanuary2004

TheWorldBankInstitutewasestablishedbytheWorldBankin1955totrainofficialsconcernedwithdevelopmentplanning,policymaking,investmentanalysis,andprojectimplementationinmemberdevelopingcountries.AtpresentthesubstanceofWBIsworkemphasizesmacroeconomicandsectoralpolicyanalysis.Throughavarietyofcourses,seminars,workshops,andotherlearningactivities,mostofwhicharegivenoverseasincooperationwithlocalinstitutions,WBIseekstosharpenanalyticalskillsusedinpolicyanalysisandtobroadenunderstandingoftheexperienceofindividualcountrieswitheconomicandsocialdevelopment.AlthoughWBIspublicationsarede

signedtosupportitstrainingactivities,manyareofinteresttoamuchbroaderaudience.

ThisreporthasbeenpreparedbythestaffoftheWorldBank.ThejudgmentsexpresseddonotnecessarilyreflecttheviewsoftheBoardofExecutiveDirectorsorofthegovernmentstheyrepresent.

Thematerialinthispublicationiscopyrighted.TheWorldBankencouragesdisseminationofitsworkandwillnormallygrantpermissionpromptly.

Permissiontophotocopyitemsforinternalorpersonaluse,fortheinternalorpersonaluseofspecificclients,orforeducationalclassroomuseisgrantedbytheWorldBank,providedthattheappropriatefeeispaiddirectlytotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,U.S.A.,telephone978-750-8400,fax978-750-4470.PleasecontacttheCopyrightClearanceCenterbeforephotocopyingitems.

Forpermissiontoreprintindividualarticlesorchapters,pleasefaxyourrequestwithcompleteinformationtotheRepublicationDepartment,CopyrightClearanceCenter,fax978

-750-4470.

AllotherqueriesonrightsandlicensesshouldbeaddressedtotheWorldBankattheaddressaboveorfaxedto202-522-2422.

ThebacklistofpublicationsbytheWorldBankisshownintheannualIndexofPublications,whichisavailablefromtheOfficeofthePublisher.


4/243

J.LuisGuaschisregionaladvisoronregulationandcompetitiveness,WorldBank,LatinAmericanandtheCaribbeanRegion,andprofessorofeconomics,UniversityofCalifornia,SanDiego.ISBN0-8213-5792-1e-ISBN0-8213-5793-X

LibraryofCongressCataloging-in-PublicationDatahasbeenappliedfor.


5/243

Contents

Forewordvii

Prefaceix

Acknowledgmentsxiii

1.Overview1InfrastructuresImportanceforEconomicGrowth2PrivateSectorParticipationandNewRegulationsandRisks6DrawingonExperiencetoImprovePerformance9OutcomesoftheRenegotiationProcess17RenegotiatingOnlyWhenJustified19

2.OptionsforPrivateParticipationinInfrastructure23ConcessionsACancelableRighttoCashFlow26TransferringInfrastructureServicestothePrivateSector26

HowDoConcessionsWork?27HowDoConcessionsDifferfromPrivatizations?30BenefitsofConcessions31DrawbacksofConcessions31ConcessionandRegulatoryDesign32

3.ConcessionsandtheProblemofRenegotiation33RenegotiationIncidenceandIncidents34ThePrincipleofFinancialEquilibriuminRegulatedMarkets:MoreRegulation,MoreRenegotiation35Bidding,Renegotiation,andGovernmentResponses:SanctityoftheBid37

TheCaseofDirectlyAdjudicatedConcessions39OtherDriversofRenegotiation40

iii


6/243

ivContents

4.AnecdotalEvidenceoftheDriversofRenegotiation43PoliticalandInstitutionalIssues44AggressiveBidding44FaultyContractDesigns48GovernmentFailuretoHonorContractClauses60DefectiveRegulationandItsEffects64ProfileofaTypicalMunicipalConcession:CommonProblemsofProcessandDesign65MacroeconomicShocks65

5.RenegotiationinTheoryandPractice71ReasonsforIncompleteContracts71IncompleteContracts,ConcessionSuccessesandFailures,andtheTheoryofRenegotiation72RenegotiationIssuesinLatinAmericaandtheCaribbean77

6.ConfirmingAnecdoteandTheory:EmpiricalAnalysis

oftheDeterminantsofRenegotiation79BasicFindings80EmpiricalAnalysisoftheDeterminantsofRenegotiation87SignificantVariablesInfluencingtheIncidenceofRenegotiation88MarginalEffectsontheProbabilityofRenegotiation90InterpretationofEmpiricalResults90

7.PolicyImplicationsandLessons:GuidelinesforOptimalConcessionDesign95ShortcomingsinConcessionDesignsandRegulationsThatLeadtoRenegotiation95GuidelinesforOptimalConcessionDesign96

TheProcessforAwardingConcessionsandAwardCriteria97ImplementationofanOptimalConcessionAwardCriteria101FinancialEquilibriumClausesfortheOperationoftheConcessionintheConcessionContract105RenegotiationClausesandTriggersforRenegotiation107SanctityoftheBid107ConcessionLengthandFinancing107InvestmentCommitments108DeterminingFutureTariffs109RegulatoryStructure:RateofReturnVersusPriceCaps111CostofCapitalandHowItShouldBeDetermined115TariffandRevenueImplicationsofIncreasedCostofCapital120


7/243

Contents

ConcessionRisksandTheirAllocation121

ValuationofConcessionAssets121

InformationalRequirementsSetintheConcessionContract127

RegulatoryAccountingNorms129

AddressingTerminationoftheConcession

andDisputeResolution134

ArbitrationRulesStatedinConcessionContract135

InstitutionalStructureofRegulatoryAgencies135

8.Conclusion141

Appendix1.DataDescription149

Appendix2.ChoiceandDefinitionofIndependentVariables157

DefinitionofTerms157

DetailedDescriptionoftheVariables161

Appendix3.EconometricAnalysis:ResultsoftheProbitEstimations167SummaryResults167CompleteEstimates171

References183

Index191


8/243

Foreword

ThistitleisthefifthinanoccasionalseriesbytheWorldBankInstituteintendedtohelpmeettheknowledgeandinformationneedsofinfrastructurereformersandregulators.Thebookbreaksnewgroundinrelationtothedesignandimplementationofconcessioncontractsbycullingthelessonsofexperiencefromsome1,000examplesandassessingwhattheselessonsmeanforfuturepractice.TheexamplesaretakenfromLatinAmericawhere,duringthe1990s,governmentsthroughouttheregionawardedcontractstotheprivatesectortooperatearangeofpublicutilities,includingelectricity;watersupplyandsanitation;andairport,railway,andportservices.Thestudyshowstheextenttowhichtheconcessionawardprocess,thecontractdesign,theregulatoryframework,andtheoverallgovernancestructuretendtodrivethesuccessofanyreformeffortandthelikelihoodofcontractrenegotiation.

Inassessingtheconcessionprocessthisbookbeginswiththepremisethattheexistingmodelandconceptualframeworkareappropriate,butthatproblemshavearisenbecauseoffaultydesignsandimplementation.Thebooksmainobjectivesaretoaidinthedesignoffutureconcessionsandregulationsandtocontaintheincidenceofinappropriaterenegotiationbymeansofthoroughanalysisanddetailedpolicylessons.Thekey

issueishowtodesignbetterconcessioncontractsandhowtoinducebothpartiestocomplywiththeagreedupontermsoftheconcessiontoensurelong-termsectorefficiencyandvigorousnetworkexpansion.

Theanalysishasimportantpolicyimplications.Indeed,thesystematicanalysisofthislargedatasetofconcessioncontractshashighlightedspecificreasonsforthehighrateofrenegotiationofconcessions,especiallyintransportandinwaterandsanitation.Itshowshowandwhythebestof

vii


9/243

viiiForeword

intentionsatthedesignstagecanbecounterproductiveifthestrategicbehaviorsofthekeyactorsarenottakenintoaccount.Thebookprovidesguidelinesforpractitionersworldwideincraftingnewconcessions,renegotiatingconcessions,andidentifyingandavoidingproblems.

Thisbookisanessentialtoolforinfrastructurereformers,regulators,andcontractrenegotiationteamsandwillhelpensurethatpublic-privatepartnershipsareusedinthemosteffectivewaytomeettheinfrastructureneedsoftheworldspoorest.

FrannieA.Lautier,VicePresidentWorldBankInstitute


10/243

Preface

Infrastructureserviceselectricity,waterandsanitation,telecommunications,roads,railroads,ports,andairportsarecriticaltotheoperationandefficiencyofamoderneconomy.Theybeginascriticalinputsintheprovisionofgoodsandservicesandsignificantlyaffecttheproductivity,cost,andcompetitivenessoftheeconomyandthealleviationofpoverty.Poorinfrastructureservicesoftenlimitcompetitivenessinothermarkets,andlimitedcoverageandaccessfosterpoverty.Policydecisionsregardingtheirprovisionandsectordevelopmenthaveramificationsthroughouttheeconomy.

Traditionallygovernment-ownedenterpriseshaveprovidedinfrastructureservices.Onaverage,however,governmentownershiphasprovendisappointing:increasesincoveragehavebeenlimited,thequalityofservicehasbeendeficient,andthelevelsofoperationalefficiencyhavebeenlow.Moreover,toimproveperformanceandcoveragemoststate-ownedenterprisesurgentlyneededsignificantinvestment.Giventhescarcityofpublicfundsforinvestmentandthecompetingneedsinthesocialsectors,mostcountrieshaveoptedtotransfertheprovisionofinfrastructureservicestotheprivatesector.Thattransferhasoftenbeenaccompaniedbysectorrestructuring

beforetheprivatizationorconcessioningandbytheimplementationofaregulatoryframework.Regulationsservebothtoprotectinvestorsfromarbitraryandpoliticallymotivatedinterventionfromthegovernmentandtoprotectusersfromtheabuseofthemonopolyordominantpositionofthenewprivateoperators.

Theneedforthatprotectionarisesbecause,quiteoften,investmentsininfrastructurearesunkcosts,thatis,coststhatcannoteasilyberecoupedorsalvagediftheeconomicatmospheredeteriorates.Thesehighsunkcostsmaytemptgovernmentstobehaveopportunistically,takingregulatory

ix


11/243

Preface

actionsthatexpropriatetheavailablequasi-rentsoncecostsaresunk.Whenpotentialinvestorsrealizethatthistemptationexists,theymaybediscouragedfrominvestinginthefirstplace,unlesstheissueisproperlyaddressedorunlessanadditionalpremiumisrequired.Thatpossibilityisthemainsourceofregulatoryrisk,affectinglevelsofinvestment,costsofcapital,andtariffs,becauseadditionalpremiumsarerequiredtocoverthatrisk.Credibleandstableregulationandtransparentrulesreducethatrisk.

Thegovernment,however,isnottheonlyentitythatmaybehaveopportunistically.Onceanenterprisehasbeengrantedaconcessionorfranchiseinaninfrastructuresector,thatenterprisemaycorrespondinglybeabletotakeactionsthatholdupthegovernment,forexample,byinsistingonrenegotiatingtheregulatorycontractexpost,orbyregulatorycapturetoextractsupranormalrentsfromtheusers,tothedetrimentofefficiency.Theextensiveinformationaladvantagesthattheenterprisepossessesoverthegovernmentregulator(aswellasoverotherpotentialoperators)isonereasonforthisopportunism.Ifthoseissuesarenotaddressedproperly,theresultmaybearegulatoryarrangementthatislesseffective

thanenvisionedinprotectingcustomersfrommonopolyabuses.Compoundingtheproblemaretheadditionalobjectivestosecureincreasedcoverage,particularlyofthepoor,ortoimplementuniversalservice.Theseobjectivesoftendonotmeshwellwiththenaturalincentivesofprivateoperatorsor,whenprovidedthroughcross-subsidies,theseobjectivesmaketheliberalizationofthesector,withopencompetitionthroughfreeentry,difficult.

Safeguardstolimitthatopportunismandtoprotectinvestorsandusersareusuallybuiltintotheconcessioncontractandtheregulatoryframework.Howeffectivetheyhavebeenisindeedaquestionandinpartthemotivationforthisbook.

Theprocessofreformconcessioningoperationstotheprivatesectorandsettingupregulatoryregimesandagenciesstartedinthemid-1980sintheLatinAmericanandCaribbeanregion.Thesecountriesnowhaveawealthofexperienceontheperformanceofinfrastructureconcessions.Somecountriesintheregionhavebeenpioneersinimplementingconcessionsaspartofthestructuralreformsoftheirinfrastructuresectors.Mostofthoseconcessionshavehadpositiveoutcomes,showingextensiveimprovementsinoperatingefficiency,inqualityofservice,andinserviceprovision.

Yetanumberofrecurrentproblemsinthesectors,suchaslimitedsharingbyusersoftheefficiencygains,pervasiveconflictsandrenegotiationsinthesectors,andweakregulatoryeffectiveness(forexample,failuretounderstandthateffectiveregulationisneededtoachievefairoutcomesthat


12/243

Prefacexi

benefitthepoor)haveraisedconcernsabouttheconcessionsmodelandledtocallsforitsevaluation.Thisbooktakesupthatcallbyassessingtheconcessionprocess,theregulatoryframework,andtheiroutcomestodeterminethecontinuedusefulnessoftheprocessforcountries,investors,andusersandtosuggestneededadjustments.Amongthemainissuesaddressedarethedesignofconcessions,theregulatoryframework,thehighincidenceofcontractrenegotiation,andtheimplicationsforinfrastructureperformanceandoverallwelfare.Thepremiseisthatthemodelandconceptualframeworkareappropriate,yettheproblemshavebeeninfaultydesignandimplementation,andthosecanandshouldbeimproved.

Theresearchdrivingthisbookwasmotivatedbytheperceivedhighincidenceandquickconcessioncontractrenegotiations,especiallythesignificantnumberseeminglymotivatedbyopportunismonbothsides,thegovernmentandtheprivateoperator.Manyconcessioncontractshavebeenrenegotiated,affectingsectorperformanceandwelfareandcompromisingthecredibilitybothofthereformprogramandofthecountriesinvolved.Thebookusesdatafrommorethan1,000concessionsininfrastructureinLatinAmericaandtheCaribbeangrantedduring19852000,analyzingtheincidenceanddeterminantsofrenegotiationasaproxyforperformance.

Thebooksmainobjectivesaretoaidinthedesignoffutureconcessionsandregulationsandtocontaintheincidenceofinappropriaterenegotiation,throughboththoroughanalysisanddetailedpolicylessons.Notallrenegotiationisundesirable.Infact,someshouldbeexpected,andsucheffortscanimprovewelfare.Opportunisticrenegotiation,however,shouldbediscouragedinbothexistingandfutureconcessions.Thekeyissueishowtodesignbetterconcessioncontractsandhowtoinducebothpartiestocomplywiththeagreed-upontermsoftheconcessiontosecurelongtermsectorefficiencyandvigorousnetworkexpansion.

Tocomplementthefindingshere,asecondphaseofanalysisisunderwaytocompileperformanceindicatorsfortheanalyzedconcessions.That

effortwillmakeevaluationoftheimpactsofrenegotiatedconcessionspossibleand,morebroadly,willallowimputationofthedeterminantsofperformancenotjustrenegotiationsuchasefficiency,coverage,qualityofservice,andsoon,inrelationtomanyofthevariablesdescribedhere,includingconcessiondesign,regulatoryframework,countryconditions,andtheexternalenvironment.


13/243

Acknowledgments

TheauthorisindebtedtoSoumyaChattopadhyayforinvaluableassistanceincompilingthedatasetanddevelopingtheempiricalanalysisusedinthisbook.HeisalsogratefultoAntonioEstacheforencouragementthroughthewritingofthisbookandforcommentsandsuggestions.Inaddition,theauthorwouldliketothankRobertoChama,PauloCorrea,EduardoEngel,VivienFoster,SueGoldmark,TonyGomez-Ibaez,GordonHughes,JoseLuisIrigoyen,MichaelKlein,Jean-JacquesLaffont,DannyLeipziger,S.C.Littlechild,AbelMejia,MoisesNaim,MartinRodriguez-Pardina,PabloSpiller,JonStern,NickStern,JoeStiglitz,StephaneStraub,JohnStrong,andCarlosVelezforhelpfulcomments.PartialfinancingfromthePublicPrivateInfrastructureAdvisoryFacilityisgratefullyacknowledged.TheexcellenteditorialassistancefromBruceRoss-Larsenisalsoacknowledged,aswellasadditionaleditingbyTheWordDoctor.

xiii


14/243

Overview

Inmostdevelopingandindustrialcountries,infrastructureserviceshavetraditionallybeenprovidedbygovernmententerprises,butindevelopingcountriesatleast,theseenterpriseshaveoftenproventobeinefficient,unabletoprovidemuch-neededinvestments,andmanipulatedtoachievepoliticalobjectives.Bycontrast,manystudieshaveshownthatoverthepast30years,private(orprivatized)enterprisesindevelopingcountrieshave,onaverage,deliveredsuperiorperformanceandneededinvestments(BirdsallandNellis2002;Guasch,Andres,andFosterforthcoming;KikeriandNellis2002;LaPortaandLopez-de-Silanes1999;McKenzieandMookherjee2003;MegginsonandNetter2001;Nellis2003;ToreroandPasco-Font2001).

Explanationsdifferonwhythisdiscrepancyexists.Privateenterprisesaredrivenbyadesireforprofitsandmayhavemoreprofessionalknowhowinmanagement,operatingprocedures,anduseofappropriatetechnology.Butperhapsthemostimportantreasonfortheirstrongerperformanceisthatprivatizationmakesinterveninginenterpriseoperationsdifficultforgovernmentsandpoliticians,sogovernmentmanipulationislesslikely.However,theissue,ingeneral,hasbeenhowtoensurethattheimprovedperformanceandefficiencygainsarepassedthroughtotheusersthroughlowertariffsandincreasedcoverage,whileallowingfirms

toearnafairrateofreturnontheirinvestments.Thefailureofuserstobenefitfromasignificantshareofthoseefficiencygainshasbeen,toalargeextent,thesourceoftheirdiscontentwiththeinfrastructurereformprogramsindevelopingcountries(Barja,McKenzie,andUrquiola2002;Bitranandothers1999;EnnisandPinto2002;Estache2003a,b;Estache,Gomez-Lobo,andLeipziger2001;FreijeandRivas2003;Lopez-CalvaandRosellon2002;Macedo2000;Navajas2000;UgazandWaddams-Price2003).

1


15/243


Privateparticipationininfrastructurehasalsobeendrivenbyanurgentneedforenormousinvestment.Toimproveinfrastructureperformanceandcoverage,mostgovernmententerpriseswouldrequiresignificantnewfinancing.Givenscarcepublicfundsandcompetingneedsinthesocialsectors,mostcountrieshaveinsteadoptedtotransfertheprovisionofinfrastructureservicestotheprivatesector.Privateparticipationcantakeavarietyofforms,frommanagementcontractstoconcessions(alsoinavarietyofforms)tofullprivatization.Whenproperlydesignedandimplemented,alltheseformshavehadsignificantsuccess.AtleastinLatinAmericaandtheCaribbean,callstotheprivatesectortotakeoverinfrastructureserviceshaveattractedmanybidders,buttosecureconcomitantimprovedsectorperformance,properdesignofconcessioncontractsandregulatoryframeworksisessential.

InfrastructuresImportanceforEconomicGrowth

Reformstoimproveandextendinfrastructureserviceshavealsobeenfueledbytherealizationindevelopingcountriesthatinfrastructurelevelsandqualityhaveahugeeffectoneconomicgrowthandpovertyalleviationandthatcurrentlevelsandqualityareinadequate.Infrastructure

servicesarecriticaltotheproductionandprovisionofgoodsandservicesandsignificantlyaffectaneconomysproductivity,costs,andcompetitiveness.Policiesontheprovisionofinfrastructureservicesreverberatethroughoutaneconomyandpoorservicesoftenlimitcompetitivenessinothermarkets.

NumerousstudiesincludingCalderon,Easterly,andServen(2003a,b);CalderonandServen(2003);Canning(1998);ReinikkaandSvensson(1999);andWorldBank(1994)illustratetheimpactofinfrastructureoneconomicgrowth.A1percentincreaseinacountryslevelofjustonetypeofinfrastructuresuchastelephonelinesperworkercanincreasegrossdomes-ticproduct(GDP)growthby0.20percentagepoints(table1.1).

ThelevelandqualityofinfrastructureinLatinAmericaandtheCaribbeanimprovedbetween1980and2000,buttheyremaindeficient.Moreover,theregionlostsignificantgroundtoEastAsianandOrganizationforEconomicCooperationandDevelopmentcountries(CalderonandServen2003).During198097,theinfrastructuregapbetweenLatinAmericaandEastAsiagrewby40percentforroads,70percentfortelecommunications,andnearly90percentforpowergeneration.Suchgapshaveenormousconsequences.During19802000,EastAsiasGDPgrowthwasalmosttwiceLatinAmericas,andthewideninginfrastructuregapaccountedfornearly


16/243

Overview

Table1.1EffectonGDPGrowthofa1PercentIncreaseinInfrastructureAssets

(percent)

IndirectDirecteffectTotalTypeofasseteffect(viaK)effectPowergenerationcapacityperworkerPavedroadsperworkerTelephonelinesperworker0.070.050.140.020.020.050.090.070.19

Note:TheKeffectreferstotheimpactviacapitalaccumulation.

Source:CalderonandServen(2003).

aquarterofGDPgap(table1.2,figure1.1).Asfigure1.1shows,thecontributionoftheinfrastructuregaptowardtheoutputgapisconsiderableforalmostallcountriesinLatinAmericaandtheCaribbean.

Manystudiesatthemicrolevelhaveillustratedtheeffectofinfrastructureonunitcosts.Forexample,infrastructurelevelsandqualityarestrongdeterminantsofinventorylevels.U.S.businessestypicallyholdinventoriesequaltoabout15percentofGDP,butinventoriesinmanydevelopingcountries,asIdocumenthere,areoftentwiceaslarge,andrawmaterials

areoftenmorethanthreetimesaslarge,asshownintable1.3(GuaschandKogan2001,2003).Theimpactofthoseinventorylevelsonfirmunitcostsandoncountrycompetitivenessandproductivityisextraordinarilysignificant.Firstarethefinancialcostsassociatedwithinventories,andthose

Table1.2TheImpactonGrowthofLatinAmericaandtheCaribbeansInfrastructureGapandItsRoleintheWideningOutputGapwithEastAsiaandthePacific,198097

IndicatorAmountChangeintheoutputgapbetweenLatinAmericaandEastAsia(percentagechangeinlogofrelativeGDPperworker)Changeintheoutputgapattributabletothegrowinginfrastructure

gap(percentagepoints,medianofcountrydata)Shareoftheinfrastructuregapintheoutputgap(percent)91.920.222.0



17/243


Figure1.1ContributionoftheInfrastructureGaptotheOutputGapRelativetoEastAsia,198097

(percentage)

VenezuelaJamaicaNicaraguaEcuadorElSalvadorPeruHondurasCostaRicaMexicoGuatemalaBoliviaBrazilArgentinaColombiaPanamaDom.Rep.

UruguayChile

InfrastructurecontributionOutputgap020406080100120140Percent


canbequitehigh,becausethecostofcapitalindevelopingcountriesis

usuallywellabove15percent.Secondaretheotherassociatedcostsofinventories,suchastaxes,insurance,obsolescence,andstorage,thatcanaddanother5percentagepoints.Table1.4,whichillustratesthemagnitudeofthosecostsbyvalueofinventoryindicatinganaveragecostof19.25percentandstandardrangeforthosecostsbetween9and50percent,pointsouttheurgencyofloweringinventorylevels.Puttingthingsintoperspective,iftheinterestrateforfinancinginventoryholdingsis1520percent,aconservativeestimateinmostdevelopingcountries,thenthecosttotheeconomyoftheadditionalinventoryholdingsisgreaterthan2percentofGDP.GiventhehighcostofcapitalinmostLatinAmericancountries,theimpactofthatquasi-deadcapitalthevalueofthoseinventoriesonunit


18/243

5

Table1.3LatinAmericaInventoriestoU.S.InventoriesRatios,AllIndustries,1990s

(averageofallavailabledata)

RepublicaBolivarianaInventory

ratioArgentinaBoliviaBrazilChileColombiaEcuadorMexicoPerudeVenezela

Rawmaterialsinventory

Mean3.104.202.982.172.225.061.584.192.82Minimum0.90

0.110.800.000.520.860.420.100.301stquartile


19/243

1.801.391.600.361.452.551.061.251.87Median2.202.902.001.281.803.801.362.302.613rdquartile3.004.493.10

2.662.525.642.063.903.12Maximum9.3034.977.1068.9213.5920.61

3.2631.107.21

Finalgoodsinventory

Mean1.862.741.981.76

1.382.571.461.651.63Minimum0.740.110.750.01


20/243

0.190.670.350.390.101stquartile1.201.131.100.171.051.670.821.170.87Median1.652.021.600.721.281.981.36

1.541.603rdquartile2.103.182.001.381.632.862.142.112.14

Maximum6.5021.315.2031.615.317.944.913.875.29

Source:Guasch

andKogan(2001).


21/243


Table1.4InventoryCarryingCostComponents

ComponentAverage(percent)Range(percent)CapitalcostTaxesInsuranceObsolescenceStorage15.001.000.051.202.008.0400.5201

0.5304Total19.259.050

Source:BowersoxandCloss(1996).

costsandproductivityorcompetitivenessisenormous.Andakeydeterminantisnotinterestrates,asclassicalmodelspredict,butpoorinfrastructure(roadsandports).Aone-standard-deviationimprovementofinfrastructuredecreasesrawmaterialinventoriesby2040percent(GuaschandKogan2003).

Likewiselogisticcosts,asreportedinGuasch(2002),aresignificantly

highinLatinAmericanandCaribbeancountries,rangingasshowninfigure1.2,fromalowforChileof15percentofvalueproducttoahighinPeruof34percent.TheOrganizationforEconomicCooperationandDevelopmentcountriesaveragehoversaround10percent.Againakeydeterminantofthosehighlogisticcostsispoorinfrastructure,especiallyroads,ports,andtelecommunications(GuaschandHahn1999).Thusinfrastructurematterssignificantlyforproductivityorcompetitivenessandgrowth.Finallythelargeimpactofinfrastructureonpovertyhasalsobeenwidelydocumented(seeBrookandIrwin2003;Chisari,Estache,andRomero1999;Estache,Foster,andWoodon2002).

PrivateSectorParticipationandNewRegulationsandRisks

Recognizinginfrastructuresimportanceand,asnoted,lackingsufficientfunds,mostdevelopingcountrieshaveturnedtotheprivatesectortofinanceandoperateinfrastructureservices,seekinginvestmentandknow-howtoaccelerateimprovementsinservicelevelsandquality.Privateparticipationisoftenprecededbysectorrestructuringandbynewlawsandregulations.Sucheffortsareintendedtoprotectinvestorsfrompoliticallymotivatedgovernmentintervention,toprotectusersfromtheabuseof


22/243

Overview

Figure1.2LogisticsCostsasaPercentageofProductValue,2000

Percent4035302520151050

Source:Guasch(2002).

monopolyordominantpositionsbynewprivateoperators(becausemanyinfrastructureserviceshavecomponentsofnaturalmonopolies),andtoensurecompetitionbetweennewentrantsanddominantincumbentoperatorswhenfeasible.Requiredinvestmentsareoftenhighlyspecificsunkcoststhatis,coststhatcannoteasilyberecoupediftheeconomicatmosphere

deterioratesoriftheoperatordiscontinuesoperationsandthatcannotbeusedforotheractivities.

Thesehighsunkcostsmaytemptgovernmentstobehaveopportunistically,takingregulatoryactionsthatexpropriaterentsoncecostsaresunk,suchascompulsoryorunilateralrenegotiationsofagreed-uponcontractterms.Atypicalscenarioisagovernment(ormayorsinthecaseofwaterconcessions,becausetheyusuallyhaveexclusivejurisdiction)seekingtosecurepopularsupportduringareelectioncampaignanddecidingtocuttariffsornothonoragreed-upontariffincreases.Anothercommonscenarioisanewadministration(ormayor)decidingnottohonortariffincreasesagreedtoinaconcessioncontractgrantedbyapreviousadministrationorpursuingdifferentprioritiesthanthepreviousadministrationandso


23/243


requestingadifferentactionplan.Investors,awareofsuchpitfalls,mightavoidinvestinginthefirstplaceunlesssuchissuesareproperlyaddressed,ortheymayrequireanadditionalpremium(highertariffs,smallertransferfees)toaccountfortherisk.

Dependingonthecountryandsector,suchregulatoryriskscanadd26percentagepointstothecostofcapital(GuaschandSpiller2001).Highertariffsorlowertransferfeesorsalepricesarethenneededtocoverthesehighercosts.Forexample,a5percentagepointincreaseinthecostofcapitaltoaccountforregulatoryriskswillreduceanofferedtransferfeeorsalepriceby35percentorrequirea20percentincreaseintariffs.Foraspecificcase,inthewaterconcessioninBuenosAires,Argentina,theregulatorgrantsa3.5percentincreaseintariffsforeach1percentagepointincreaseinthecostofcapital.

Governmentsarenottheonlypartieswhomaybehaveopportunistically.Onceaprivateenterprisehasbeengrantedaconcessioninaninfrastructuresector,itmaybeabletoholdupthegovernmentforexample,byinsistingonrenegotiatingthecontract,seekingmorefavorableterms,orusingregulatorycapture.1Anenterprisesextensiveinformationadvantagesovergovernment(and,inmostcases,overotherpotentialoperators)

andperceivedleverageinnegotiationscangiveitstrongincentivestorenegotiateacontractandsecureabetterdealthantheoriginalbid.Theresultingregulatoryarrangementsmaybelesseffectiveinprotectingcustomersfrommonopolyabuses.Thusthedesignofregulations,concessionandprivatizationcontracts,andimplementationagreementscansignificantlyaffectsectorperformanceandtheincidenceofrenegotiation(FundacindeInvestigacionesEconmicasLatinoamericanas1999;Gomez-Ibanez2003;GuaschandSpiller2001;Manzetti2000).

Moreover,neutraleventsnotinducedbygovernmentsorserviceprovidersforexample,internalorexternalmacroeconomicshockssuchasthesharpdevaluationsinMexicoin1994,Brazilin1999,andArgentina

in2001cansignificantlyunderminethefinancialequilibriumoffirms,becauseforinfrastructureservices,revenuesarecollectedinlocalcurrencybutinvestments,equity,anddebtareusuallyinforeigncurrencysuchasU.S.dollars(foranillustrationseeBenitez,Chisari,andEstache2003).Theimpactofsucheventsshouldbeaddressed,asmuchaspossible,inspelled-outcontingenciesinthecontractandalsobyguidelinesforthe

1.Regulatorycapturemeanstheoperatororconcessionaireundulysecuresinfluenceovertorcovertovertheregulatoryprocesstobiastheregulatorsdecisionsinfavoroftheinterestsoftheoperatororconcessionaire.


24/243

Overview

processandsubstanceoftheadjustmentintheconcessioncontracts.Intherenegotiationinducedbysuchevents,however,negotiatorsshouldbecarefultoavoidimproperlyreallocatingrentstoeitherparty.Thepossibilityofsuchneutraleventsandthefactthatconcessioncontractsoftendonotprovideclearguidelinesonhowtorespondtothemalsoincreaseregulatoryrisks.Thus,asmuchaspossible,contractsshouldprovideclearguidelinesforadjustmentsinsuchconditions.

Barringmajorunforeseenevents,andothersthatcanbespelledinthecontractascontingencies,thekeyissuesare,first,thedesignofaproperconcession,regulatoryframework,andcontractualarrangementsand,second,howtoincreasethelikelihoodthatbothsignatorypartiestoaconcessioncontractcomplywithtermsofthecontractandavoidopportunisticrenegotiation.Akeystartisthedesignofbettercontractsthatdonotfacilitaterenegotiationandthatpenalizenoncompliance.

DrawingonExperiencetoImprovePerformance

Afternearly20yearsofexperience,countrieshavenoexcuseformosterrorsinthedesignandimplementationofconcessionsandrelatedregulations.

Faultydesignandimplementationhavesignificantimplicationsforbothefficiencyandequity,affectinggeneralperceptionsofthevalidityofconcessions.Moreover,manysuchproblemscanbecorrectedrelativelyeasily.

InmanyLatinAmericanandCaribbeancountries,perceptionsarewidespreadthatprivatizationandconcessionprogramshavebeenunfairandhavebenefitedthewealthyandhurtthepoorthroughjoblossesandhighertariffsandthatprocesseshavelackedtransparency,proceedshavebeenmisused,efficiencygainssecuredbyoperatorshavenotbeensharedbytheusers,andcorruptionhasrunrampant.

Manystudieshaveevaluatedtheperformanceofthoseinfrastructure

reformprogramsandshowedsignificantimprovements,buttheyalsopointoutproblemsandperhapsfuelperceptions(forareviewofthetheoryseeCoelliandothers2003,andforillustrationsseeEstache,Gonzalez,andTrujillo2002a,b).Inparticular,anumberofstudiesevaluateefficiencygainsofconcessionedfirms,showingsignificantannualgains,rangingfrom19percent(seeEstache,Guasch,andTrujillo2003forasummary),buttheyalsoreportatbestaweakcorrelationwithtariffchanges.Theintendedobjectivesandexpectationsoftheconcessionandregulatoryframeworkweretoprovideincentivesforfirmstosecureefficiencygainsparticularlythroughprice-capregulatoryregimes.Throughproperregulation,accordingtothedesignobjective,thoseefficiencygainswouldbepassedtotheusersvialowertariffs.Table1.5illustratesacaseofthelackofsharingof


25/243

10

Table1.5ComparingAnnualRealTariffChangessincePrivatizationandConcessionwithEfficiencyGainsinArgentina

(percent)

ElectricityGas

WaterTelecommunicationsIndicatordistributiondistributiondistributionservice

Evidenceofthepoorcorrelationbetweenaverage

tariffsandefficiencychanges

Annualaveragetariffchange0.750.8+1.750.6

(forAguasArgentinas)Approximationofannualefficiency12.96.1


26/243

3.9gainsusedintariffrevision(shift)(shift+average(shift+averagecatchingup(shift+catchingup)catchingup)forfourwater

companies)

Evidenceoftheincreasedshareofrentallocatedtothegovernmentrather

thantotheusers

Indirecttax2057203020304050

Source:Estache,

Guasch,andTrujillo(2003).


27/243

Overview11

efficiencygainsbyusersinArgentina.Althoughefficiencygainswerelarge,rangingfrom1to6percent,tariffdecreaseswerequitelow,lessthan1percent.Insomecases,suchasinthewatersector,tariffsincreased,butthegovernmentdidkeepashareofthoseefficiencygains,directlybenefiting,throughincreasedtaxrevenues.

Reinforcingtheargumentthatefficiencygainswereseldompassedthroughtheusersaretheclaimsthatmanynewprivateoperatorshavefaredquitewellontheirinvestmentsandthatgovernmenttaxrevenuesfromoperatorshavebeensignificant.PreliminaryevidencefromFosterandothers(2003)inanongoingstudyoftheprofitabilityofprivateparticipationininfrastructureinLatinAmericashowsthat,onaverage,duringthe1990s,theinternalrateofreturn(IRR)wassignificantlyabovethecostofequityfortelecommunicationsoperations,aboutthesameforenergyoperations,andbelowthecostofequityforwaterandsanitationoperations,althoughthevarianceislargeandanumberoffirmshavenotfaredwell(table1.6).2Thatweakorabsentcorrelationbetweenefficiencygainsand

Table1.6AverageProfitabilitybySectorofPrivatizedandConcessionedFirmsandtheCostofEquityinLatinAmericanandCaribbeanCountries,19902000

(percent)

SectorIRR(adjusted)aInitialcostofequitybTelecommunications26.814.0Waterandsanitation13.015.5Energy14.014.0

a.TheIRRhasbeenadjustedtoincorporatemanagementfees.b.Costofequityisevaluatedatthetimeofthetransaction.Source:Fosterandothers(2003).2.Tomeasuretheoverallreturnthatshareholdersinaspecificprojectearnedonthecapitaltheyinvestedinthatprojectandthendetermineifthatreturnis

appropriategiventherisktheytook,onecomputestheIRRtheymadeontheirinvestmentandcomparesitwiththecostofequity(CE)inthecountryandsectorofinvestment.TheprojectIRRisthereturnearnedbyinvestorsintheprojectfromflowsofdividendsminusflowsofcapitalinjectionsintotheprojectoverthelifeoftheproject.Mathematicallyitisthereturnthatbringstozerothenetpresentvalueofthenetflowsearnedbytheprojectshareholdersontheirinvestment,thatis,dividendsminuscapitalinjections.Thecostofequityisameasureoftheappropriate

returnthatinvestorsshouldexpectonequityinvestmentsinaspecificcountryandsector,giventhelevelofriskofsuchinvestments.


28/243

12GrantingandRenegotiatingInfrastructureConcessions

lowertariffsandtheperceivedprofitabilityoftheprivateoperators,oftensecuredthroughadditionalbenefitscapturedthroughrenegotiation,havebeenatthecoreoftheincreasingdissatisfactionamongusers.

Accordingtoalate2001surveybyLatinobarometro,63percentofpeoplein17countriesinLatinAmericaandtheCaribbeanbelievedthatprivatizationsofstatecompanieshadnotbeenbeneficial,upfrom57percentin2000and43percentin1998(McKenzieandMookherjee2003).SuchnegativeperceptionshaveachievedenoughmomentumtodelayprivateparticipationininfrastructureinPeru,toabortitsstartinEcuador,andtothreatentobacktracktheprocessinBoliviaandelsewhere.3Theseconcernsmustbeaddressedandresolvedthroughasystematicevaluationoftheconcessionsprocesstodrawlessonsforimprovementthemotivationforthisbook.

Toalargeextentthesenegativesentimentsaredrivenbythehighincidenceofrenegotiationandtheresponsestoit.Renegotiationimpliesalackofcompliancewithagreed-upontermsanddeparturesfromexpectedpromisesofsectorimprovements.Onaverage,theoutcomeofrenegotiationsadverselyaffectedtheusers.

Renegotiationhasoccurredifaconcessioncontractunderwentasignificantchangeoramendmentnotenvisionedordrivenbystatedcontingenciesinanyofthefollowingareas:tariffs,investmentplansandlevels,exclusivityrights,guarantees,lump-sumpaymentsorannualfees,coveragetargets,servicestandards,andconcessionperiods.Standardscheduledtariffadjustmentsandperiodictariffreviewsarenotconsideredrenegotiations.

Toillustratetheproblematicofrenegotiationofconcessions,thisoverviewpresentsanumberofkeysummarystatisticsfromthecompileddatasetofmorethan1,000concessionsgrantedintheLatinAmericanandCaribbeanregionduring19852000.

Renegotiationwasextremelycommonamongtheconcessionsinthesample,occurringin30percentofthem(table1.7).Notincludingtheconcessionsinthetelecommunicationssector,becausepracticallyalltelecommunicationsprojectswereprivatizedratherthanconcessioned,raisestheincidenceofrenegotiationto41.5percent.Renegotiationwasespecially

3.ExamplesofineffectiveconcessionsincludehighwayconcessionsinMexico;waterconcessionsinTucumanandBuenosAires,Argentina,andCochabamba,Bolivia;build-operate-transferwaterconcessionsinMexico;electricitydistributionconcessionsinArequipa,Peru;andrailroadconcessionsinColombia.


29/243

Overview13

Table1.7IncidenceofRenegotiation,TotalandbySector

TotalIncidenceofrenegotiationTotal(excludingtelecommunications)ElectricityTransportationWaterandsanitationPercentageofrenegotiatedcontracts3041.59.754.774.4

Source:Authorscalculations.

commonintransportationconcessions,occurringin55percentofconcessions,andevenmoresoinwaterandsanitationconcessions,occurringin74percentofconcessions.

Renegotiationwasfarlesscommonintelecommunicationsandenergy,tosomeextentasaresultofthemorecompetitivenatureofthesesectors.Thatcompetitivenaturesignificantlyreducestheleverageofconcessionairesandbargainingpowerforrenegotiations.Inmostcases,telecommunicationsandenergyconcessionairesarenottheonlyserviceproviders,sogovernmentshavemoreoptionsforsecuringtheseservicesfromotheroperatorsintheeventofathreatbyoperatorstoabandontheconcessionsifrenegotiationdemandswerenotmet.

Mostrenegotiatedconcessionsunderwentrenegotiationverysoonaftertheiraward,withanaverageofjust2.2yearsbetweenconcessionawardsandrenegotiations(table1.8).Renegotiationscamemostquicklyinwater

andsanitationconcessions,occurringanaverageof1.6yearsafterconcessionawards.Renegotiationsoftransportationconcessionsoccurredafteranaverageof3.1years,perhapsreflectingthesectorslongerconstructiontimes.Moreover,thevarianceinthedistributionofrenegotiationperiodswassmall,with85percentofrenegotiationsoccurringwithin4yearsofconcessionawardsand60percentoccurringwithin3yearsforconcessionsthatweresupposedtorunfor1530years(table1.9).

ContractAward

Mostoftheconcessionsinthesamplewereawardedthroughcompetitivebiddingratherthanthroughdirectadjudicationandbilateralnegotiation(table1.10).Butrenegotiationwasfarlesslikelyinconcessionsawarded

noncompetitively,occurringinjust8percentofsuchcontractscompared


30/243


31/243

muchmorefavorableconcessionterms,andthatflexibilitylessenstheincentivesforrenegotiation.


32/243

Overview15

Table1.11PercentageofConcessionsRenegotiatedAccordingtoCompetitiveorNoncompetitiveProcessExcludingtheTelecommunicationsSector

IncidenceofrenegotiationbytypeofprocessFrequencyRenegotiationwhenawardedviacompetitivebidding46Renegotiationwhenawardedviabilateralnegotiations8


TypeofRegulation

Mostconcessions,56percent,wereregulatedthroughaprice-capregime.About20percentoftheconcessionswereregulatedthrougharate-of-returnregime,andabout24percenthadahybridregime(table1.12).

InitiatorofRenegotiation

In61percentofcases,concessionariesrequestedrenegotiation,andin26percentofthecases,thegovernmentinitiatedrenegotiation(table1.13).Intheremainingcasesboththeconcessionaireandthegovernmentjointlysoughtrenegotiation.Whenconditionedbythetypeofregulatoryregime

inplace(table1.14),onecanseethatoperatorswerepredominantlyandalmostexclusivelytheinitiatorsofrenegotiation(83percent),butunderarate-of-returnregime,thegovernmentledtherequestforrenegotiation,althoughwithamuchlowerincidence(34percent).Thatfigureispartiallyexplainedbytheincreasedrisktotheoperatorofaprice-capregulatoryregime.

Table1.12DistributionofConcessionsbyTypeofRegulation

(percent)

TypeofregulationFrequencyPricecap

RateofreturnHybrida562024

a.Hybridregimesaredefinedwhen,underaprice-capregulatoryregime,alargenumberofcostcomponentsareallowedanautomaticpass-throughintotariffadjustments.Source:Authorscalculations.


33/243


Table1.13WhoInitiatedtheRenegotiation?

(percentageoftotalrequests)

SectorBothgovernmentandoperatorGovernmentOperatorAllsectors132661Waterandsanitation102466Transportation162757


InvestmentObligations

Mostconcessions,73percent,hadinvestmentobligationsthathadtobemetbytheoperator,andonlyabout21percentwererequiredtocomplywithperformanceoroutputindicatorsonly.About6percenthadbothinvestmentobligationsandoutputindicators(table1.15).

ContractFeaturesandtheIncidenceofRenegotiation

Renegotiationwasfarmorelikely(renegotiationoccurredin60inpercentofcases)whenconcessioncontractawardswerebasedonthelowestproposedtariffratherthanonthehighesttransferfee(11percent);seetable1.16.Renegotiationwasalsomuchmorelikelywhenconcessioncontractscontainedinvestmentrequirements(70percent)thanwhentheyincludedperformanceindicators(18percent).Moreover,theincidenceofrenegotiationwasmuchhigherunderprice-capregulation(42percent)thanrate-of-returnregulation(13percent),andwhenaregulatoryagencywasnotinplace(61percent)thanwhenonewasinplace(17percent).Finally,renegotiationwasmorelikelywhentheregulatoryframeworkwasembeddedinthecontract(40percent)thanwhenembeddedinadecree(28percent)oralaw(17percent).

Table1.14WhoInitiatedtheRenegotiationConditionedonRegulatoryRegime?

(percentageoftotalrequests)

RegulatoryregimeBothgovernmentandoperatorGovernmentOperatorPricecapRateofreturn11396

348326Hybridregime302644



34/243

Overview17

Table1.15DistributionofConcessionsbyExistenceofInvestmentObligationsinContract

(percent)

InvestmentobligationsversusperformancePercentageindicatorsinconcessioncontractsofcontracts

Investmentobligationsincontract73Noinvestmentobligationsincontractbutperformanceindicators21Hybrid6


Table1.16ContractFeaturesandtheIncidenceofRenegotiatedConcessionsinLatinAmericaandtheCaribbean,Mid-1980sto2000

IncidenceofrenegotiationFeature(percent)

AwardcriteriaLowesttariff60Highesttransferfee11

RegulationcriteriaInvestmentrequirements(regulationbymeans)70Performanceindicators(regulationbyobjectives)18

RegulatoryframeworkPricecap42Rateofreturn13

Existenceofregulatorybody

Regulatorybodyinexistence17Regulatorybodynotinexistence61

ImpactoflegalframeworkRegulatoryframeworkembeddedinlaw17Regulatoryframeworkembeddedindecree28Regulatoryframeworkembeddedincontract40


OutcomesoftheRenegotiationProcess

Themainissuesintherenegotiationprocesswerenotsurprising:tariffadjustm

ents,investmentobligationsandtheirschedule,costcomponentsthatweretobeautomaticallypassedthroughtotariffs,adjustmentsontheannualfeeusuallybasedonrevenuespaidbytheoperatortothegovernment,changesintheassetbasetoimputerateofreturnandextensionof


35/243


36/243

Overview19

RenegotiatingOnlyWhenJustified

Inprinciple,renegotiationcanbeapositiveinstrumentwhenitaddressestheinherentlyincompletenatureofconcessioncontracts.Properlyused,renegotiationcanenhancewelfare.Althoughsomerenegotiationisdesirable,appropriate,andtobeexpected,thishighincidenceexceedsexpectedandreasonablelevelsandraisesconcernsaboutthevalidityoftheconcessionmodel.Itmightevenindicateexcessivelyopportunisticbehaviorbynewoperatorsorbygovernments.Suchbehaviorunderminestheefficiencyoftheprocessandtheoverallwelfare,becauserenegotiationtakesplacebetweenthegovernmentandtheoperatoronly,soitisnotsubjecttocompetitivepressuresandtheirassociateddiscipline.Whenusedopportunisticallyorstrategicallybyanoperatororgovernment,tosecureadditionalbenefits,andnotdrivenbytheincompletenessofacontract,renegotiationcanunderminetheintegrityofaconcession,reducewelfare,andthreatenthedesiredstructuralreformprogramininfrastructure.Thehighincidenceofrenegotiationreportedhereshouldindeedbeacauseofconcern.

Renegotiation,particularlyopportunisticrenegotiation,canreduceoreliminatetheexpectedbenefitsofcompetitivebidding.Iftheauctionis

designedwellandprovidesadequateincentives,competitivebiddingfortherighttooperateaconcessionforagivennumberofyearsshouldelicitthemostefficientoperator.Ifbiddersbelievethatrenegotiationisfeasibleandlikely,however,theirincentivesandbiddingwillbeeffected,andtheauctionwilllikelyselect,notthemostefficientprovider,buttheonemostskilledatrenegotiations.Renegotiationshouldoccuronlywhenjustifiedbytheinitialcontractsbuilt-incontingenciesorbymajorunexpectedevents.Theobjectiveistoimprovethedesignofconcessionstosecurelong-termsectorefficiency,fosteringcompliancewiththetermsagreedtobyboththegovernmentandtheoperator.Toestablishsuchanenvironment,concessionlawsandcontractsshouldincludetheelementslistedbelow.Concessioncontractelementscanbegroupedintotwocategories:(a)thoserequiredtodesigncontractsthatfocusonsecuringlong-termsectorefficiencyand

discourageopportunisticbiddingandrenegotiation,and(b)thoserequiredtoimplementregulationsthatimpedeopportunisticrenegotiationandforcecontractcompliance.

Gooddesignincludesthefollowingconcessioncontractelements:

Concessioncontractsshouldbeawardedcompetitivelyanddesignedtoavoidambiguitiesasmuchaspossible.Contractsshouldclearlydefinethetreatmentofassets,evaluationofinvestments,outcome


37/243


indicators,proceduresandguidelinestoadjustandreviewtariffs,andcriteriaandpenaltiesforearlyterminationofconcessionandproceduresforresolutionofconflicts.

Concessioncontractsshouldcontainclausescommittinggovernmentstoapolicyofnorenegotiationexceptinthecaseofwell-definedtriggers.Theyshouldstipulatetheprocessforandlevelofadjustments.Thecontractshouldspecifythattheoperatorswillbeheldtotheirsubmittedbids.Thisapproachforcesoperatorstobearthecostsofaggressivebidsandofnormalcommercialrisksevenifdoingsoresultsintheabandonmentofconcessions.Inaddition,thefirsttariffreviewshouldnotbeentertainedforasignificantlylongperiod(atleastfiveyears)unlesscontractcontingenciesaretriggered.Concessioncontractsshouldprovideforsignificantcompensationtooperatorsintheeventofunilateralchangestothecontractbythegovernment,includingpenalties.Considerationshouldbegiventomakingoperatorspayasignificantfeeforanyrenegotiationrequest.Iftherenegotiationisdecided

intheoperatorsfavor,thefeewouldbereimbursed.Detailedanalysisofseeminglyaggressivebidsoratleastofthetoptwobids,particularlyiftheydiffersignificantlyshouldberequiredbeforeaconcessionisawarded.Andifthefinancialviabilityofaggressivebidsappearshighlydubious,amechanismshouldbeinplacetoallowthosebidstobedisqualifiedortoincreasetheperformancebondsignificantlyinrelationtothedifferencebetweenthebids.Inanycase,operatorsshouldberequiredtopostperformancebondsofsignificantvalue.Claimsforrenegotiationshouldbereviewedastransparentlyaspossible,possiblythroughexternal,professionalpanelstoassistregulators

andgovernmentsintheiranalysisanddecisionmaking.Anyadjustmentsgrantedshouldbeexplainedtothepublicasquicklyaspossible.Goodimplementationincludesthefollowingcontractelements:

Hurried,quicklyorganizedconcessionprogramsshouldbeavoided.Suchanapproachmightsecuremoretransactions,butitalsoleadstolesssatisfactoryoutcomes.Infrastructureconcessionsshouldbeawardedthroughcompetitivebiddingratherthandirectadjudicationorbilateralnegotiation


38/243

Overview21

andonlyaftercontractshavebeencarefullydesignedandreviewedandthequalificationsofbiddershavebeenscreened.

Anappropriateregulatoryframeworkandagencyshouldbeinplacepriortotheawardofconcessions,withsufficientautonomyandimplementationcapacitytoensurehigh-qualityenforcementandtodeterpoliticalopportunism.Inaddition,thetradeoffsbetweentypesofregulationpricecapandrateofreturnshouldbewellunderstood,includingtheirdifferentallocationsofriskandimplicationsforrenegotiation.Technicalregulationshouldfitinformationrequirementsandexistingrisks,andregulationshouldbebyobjectivesandnotbymeans.Thusperformanceobjectivesshouldbeusedinsteadofinvestmentobligations.Properregulatoryaccountingofallassetsandliabilitiesshouldalsobeinplace,toavoidanyambiguityabouttheregulatorytreatmentandallocationofcost,investments,assetbase,revenues,transactionswithrelatedparties,managementfees,andoperationalandfinancialvariables.Toensureconsistency,lock-ineffects,andadequatetariffs,contractsshouldgenerallybeawardedonthebasisofthe

highestproposedtransferfeeratherthanthelowestproposedtariff.4Finally,outcometargets(regulationbyobjectives)shouldbethenormincontractsratherthaninvestmentobligations(regulationbymeans)4.TheleastpresentvalueofrevenuescriteriadevelopedbyEngel,Fischer,andGaletovic(2001)shouldbestronglyconsideredforroadconcessions,givenitsbuiltinincentivesdeterringrenegotiation.


39/243

OptionsforPrivateParticipationinInfrastructure

Inthemid-1980smanydevelopingcountries,startinginLatinAmericaandtheCaribbean,initiatedsignificanteconomicreforms.Alargecomponentofthosereformsinvolvedallowingprivatesectorparticipationintheprovisionofinfrastructureservices,transferringfromgovernmentstoprivateenterprisessignificantpartsofthemanagementandcontrolofutilityoperations.Theseprivateenterpriseswereeitherexistingindividualcorporateentitiesorconsortiumsofsuchentities(foreignanddomestic)formedtoprovidetheseservices.Thedrivetobringinprivatesectorparticipationwasmotivatedbythedesireandneedtoimprovesectorperformanceandtosecuremuchneededinvestmentsthatthepublicsectorwasunabletoprovidebecauseofthescarcityofpublicfundsandcompetinginvestmentneedsinthesocialsectors.

Manytypesofprivateparticipationoccurintheprovisionofinfrastructureservices(figure2.1).Eachtypediffersintermsofgovernmentparticipationlevels,riskallocations,investmentresponsibilities,operationalrequirements,andincentivesforoperators(table2.1).Themostcommontypesareprivatizationsandconcessionsand,toamuchlesserextent,managemen

tcontracts.

Insectorssuchastelecommunications,andtosomeextentelectricitygenerationandnaturalgas(theusualpioneersectorsforprivatesectorparticipation),privatesectorparticipationhasgenerallybeenachievedthroughoutrightprivatizationthatis,divestitureaccompaniedbystructuralreformsofmarketstructuresandregulations.Butinothersectorsports,airports,roads,railroads,waterandsanitation,andsegmentsofthe

23


40/243


Figure2.1TypesofPrivateParticipationinInfrastructure

PublicsupplyandoperationOutsourcingCorporatizationandperformanceagreementsManagementcontractsLeasing(affermage)FranchiseConcessionBuild-operate-transfer(BOT)Build-own-operate(BOO)DivestiturebylicenseDivestiturebysalePrivatesupplyandoperationPrivatizationsConcessionsSource:Guasch(2002).

electricitysectorlegal,political,andconstitutionalrestraintshaveimpededthesaleofpublicutilitiestoprivateparties(whichareoftenforeigncompanies,

makingtheissueevenmorecomplicatedpolitically).

Moreover,insomecountriesthathavenolegalorconstitutionalimpedimentstofullprivatizationofinfrastructureservices,concernsaboutperformancehaveledgovernmentstoretainsomecontrolinvarioussectors.Thusinmanycountrieswherethestatecouldnotordidnotwanttotransferownershipofpublicassetstotheprivatesector,innovativestrategieshavebeenusedtointroduceprivateparticipationininfrastructure.Amongthealternativestooutrightprivatization,concessionsfortherighttooperateaserviceforadefinedperiodhaveemergedastheleadingapproach.InLatinAmericaandtheCaribbean,concessionshavebeenespeciallycommonforwaterandsanitationandtransportationservices(table

2.2).Aselsewhere,outrightdivestiturehasbeenthepreferredmodefortelecommunications.


41/243

OptionsforPrivateParticipationinInfrastructure25

Table2.1JurisdictionsandResponsibilitiesunderDifferentTypesofPrivateParticipation

ManagementVariablecontractsConcessionsPrivatizations

OwnershipofphysicalandlandassetsGovernmentGovernmentPrivateoperatorOwnershipofvehiclesGovernmentGovernment/PrivateoperatorprivateoperatorInvestmentresponsibilitiesGovernmentPrivateoperatorPrivateoperatorServicecontrolGovernmentGovernment/Government/privateoperatorprivateoperatorTariffcontrolGovernmentGovernment/Government/privateoperatorprivateoperatorRevenueriskGovernmentPrivateoperatorPrivateoperatorCostriskGovernmentPrivateoperatorPrivateoperatorLaborriskGovernmentPrivateoperatorPrivateoperatorManagementcostriskPrivateoperatorPrivateoperatorPrivateoperatorSource:Authorscompilation.

Table2.2IncidenceofConcessionsinInfrastructureProjectsInvolvingPrivateParticipationinLatinAmericaandtheCaribbean,19902000

SectorNumberofprojectsNumberofconcessionsConcessionsasshareofallprojects(percentage)

Waterandsanitation918189TransportationEnergyTelecommunications281364113274198398543

Total84955365

Source:WorldBank,privateparticipationininfrastructuredatabase2002.


42/243


ConcessionsACancelableRighttoCashFlow

Concessionsgrantaprivatefirmtherighttooperateadefinedinfrastructureserviceandtoreceiverevenuesderivingfromit,usuallybasedonacompetitivebiddingprocess.Concessionsaretypicallygrantedforaspecifiedperiodtothefirmthatofferstoprovidetheserviceonthebesttermswhilemeetingcertaincriteria,generallyinvolvingqualityandinvestment.

Concessionsalsoincludegreenfield(brandnew)projectssuchasbuildoperate-transfer(BOT)contracts,astandardfeatureoftheenergysectorthatisbecomingmorecommoninotherinfrastructuresectors.Acommonapproachisoneinwhichconcessionairesfinanceinvestmentsinexchangeforlong-termpurchase(off-take)agreementsfor8090percentofafacilityscapacity.Thedevelopmentofpowerplantsandgastransmissionpipelinesbyindependentoperators(thosenotpartofverticallyintegratedutilities)relyheavilyonsucharrangements.BOTcontractshavealsobeenusedforlargewatersupplysystems(suchasreservoirs),transmissionpipelines,watertreatmentplants,andsewagetreatment.

TransferringInfrastructureServicestothePrivateSector

Thetransferofpublicinfrastructureservicestotheprivatesectorwhetherthroughaprivatizationoraconcessiontypicallyinvolvesthefollowing(seeNewbery2000foradetailedandlucidexposition):

Sectorrestructuringandunbundling,inwhichstatecompaniesarebrokendown(unbundled)tofacilitatecompetitionandreducepotentialabusesofmonopolypowersordominantpositions.Verticalandhorizontalrestrictionsareoftenimposed,againtopreemptabusesofdominantpositionsandpromotestrategicuseofessentialfacilities.Regulatoryreform,inwhichregulationsareimplementedandregulatory

agenciesareestablishedtorestrictnaturalmonopolyadvantagesandtoprotectusersfrommonopolisticbehaviorandinvestorsfromarbitrarygovernmentaction.Prequalification,whichsetsbasictechnicaloreconomicconditions(orboth)thatcompetingprivateoperatorsmustfulfilltobeeligibleforthebiddingandselectionprocesses.Competitivebiddingoranauctionmechanismtodissipatemonopolyrentsandselectthemostefficientoperatoramonginterestedprivateoperators.


43/243


Awardoftheconcessioncontracttooneoftheprivateoperatorsbasedonselectioncriteria.Concessioncontractcomponents,includingstipulationsforitsduration,investmentrequirements,qualityandserviceparameters,revenuesources,regulatoryprovisions,frequencyoftariffadjustmentsandreviewprocesses,andtransferofassetsoncontractterminationorconclusion.Concessioncontractenforcementandregulatoryoversight,whichareprovidedbytheregulatoryagencyifitexists;ifnot,thenbythesectorministry.HowDoConcessionsWork?

Concessioncontractsaretypicallydefinedbyfourfeaturesasfollows:

Thecontractgovernstherelationshipbetweentheconcession-grantingauthorityandtheprivateconcessionaire.1Theconcession-grantingauthorityisthegovernment,aninterministerialcommission,or

lesscommonandleastappropriatetheregulatoryagency.Theconcessionisawardedforalimitedbutpotentiallyrenewableperiod.Duringthisperiodtheconcessionaireenjoystheexclusiverighttousetheassets,exploitexistingfacilities,anddevelopnewones.Thecontractdeterminestheconditionsandpricesatwhichtheconcessionaireprovidestheserviceandusesthesefacilities,whichcontinuetobepubliclyowned.Theconcessionaireisresponsibleforallinvestmentsandfordevelopingallnewfacilitiesmanyofwhicharespecifiedinthecontractunderthesupervisionofthestateorregulator.Theconcessionaireretainscontrolanduserightsoverthenewassets

untiltheyarehandedoverattheexpirationofthecontract.Thecontractmightcontainaclausespecifyingcompensationforinvestmentsnotfullyamortizedbytheendoftheconcessionperiod,andclausesspecifyingcausesandremediesforearlyterminationofcontractandstatingpenaltiesandfinesfornoncompliancewithagreed-uponterms.1.Thebookusesthetermsconcessionaireandoperatorinterchangeably,meaningtheprivatepartyoperatingtheconcession.


44/243


Theconcessionaireisremuneratedbasedoncontractuallyestablishedtariffs(withappropriateguidelinesforreviewandadjustment)collecteddirectlyfromusers.Thesepricesaretypicallyregulatedthroughrate-of-returnorprice-capmechanisms,usuallydrivenbytheprincipleofefficientfinancialequilibriumallowingthefirmtoearnafairrateofreturnonitsinvestments.Ifrevenuesdonotcovercosts,compensationmechanismsareestablished(seeKerfandothers1998formoredetailsonconcessionfeatures).Giventhewiderangeofsettingsinwhichtheyareused,however,concessionsareoftenfarmorecomplicatedthanthesebasicfeaturessuggest.Concessioncontractsalsousuallycontainotherobligationsandrightsthatrequireregularregulatoryoversightinmonitoringcompliance,reconcilinginterpretations,adjustingtariffs,periodic(usuallyquinquennial)tariffreviews,andrenegotiatingtriggersandterms(whenappropriateandinlightofexperience).Governmentsroletheninvolvessettingrulesforcompetitionatthebiddingstageandenforcingtermsofagreementsandcompliancewithregulations(box2.1).

Thedurationofconcessioncontractstendsto(andusuallyshould)reflect

thenumberofyearsthatinvestorsrequiretorecouptheirinvestments,althoughsettingthetimetosecurefullamortizationmightnotbeessentialorpossible.Infrastructureservicesrequirecontinuousinvestmentsthatcannotbepredicteddecadesinadvance,andinvestmentsalmostalwaysmustmadetowardtheendofthecontractandcannotbeamortizedbeforeitsexpiration.Moreover,thetruevalueofthebusinessincludestheincumbentsunamortizedassetsandsuchintangiblesasknow-howandreputation.Thuscontractsshouldprovideincentivestomaintainallservice-relatedfacilitiesthroughoutthelifeoftheconcession.

Forexample,agovernmentcouldpayaprivateoperatorbasedonanevaluationbyanindependentexpert.Oraconcessioncouldbere-bidperiodically,

asArgentinahasdoneinthepowersectorwhereconcessionsarefor95yearsbutarere-bidafterthefirst15yearsandthenafterevery10years.Iftheincumbentoutbidsitsopponents,itretainscontrol.Ifnot,itrelinquishescontrolbutiscompensatedforoutstandinginvestments.InmonopolisticsectorsevenBOOschemesneednotimplypermanence.Althoughtheprivatecompanyownstheassetsindefinitely,toprovidetheserviceitoftenneedsanoperatinglicensethatthegovernmentcanrevokeatanytime(subjecttocertainconditionsandstipulatedcompensation).

Becauseallpossiblecontingenciescannotbeaccountedforinregulationsandconcessioncontracts,concessionsmayprovideregulatorswith


45/243


Box2.1ASampleofGovernmentResponsibilitiesforConcessions

FrameworkDesignofconcessionarrangements

AdoptinglegalprovisionstoChoosinglegalinstrumentsenablethegrantingofconces-AllocatingresponsibilitiessionsChoosinganddesigningpricingEstablishingoridentifyingrulesandperformancetargetsregulatoryauthoritiesDeterminingbonusesandManaginggovernmentsupportpenaltiestoinfrastructureprojectsDeterminingdurationandManagingpublicrelationsandterminationinformation.DesigningadaptationmechanismstoneworunforeseenProjectidentificationandanalysiscircumstances

IdentifyingandprioritizingChoosinganddesigningdisputeprojectsamenabletoconcessionssettlementmechanisms.HiringadvisersPerformingapreliminaryreviewConcessionawardofprojectcostsandbenefitsChoosingtheawardmethod(withoutduplicatingtheanalysisMakingdecisionsabouttobeperformedbytheprivateprequalificationandshortlistingsector),especiallyincaseswhereDeterminingbidstructureandthegovernmentwillbeassum-evaluationmethodingsomeofthemarketriskDeterminingbiddingrulesand

ReviewinglegalandregulatoryproceduresissuesProceedingwiththebiddingDeterminingpreliminaryNegotiating.selectioncriteriaGrantingpermissionfortheExerciseofregulatoryfunctionprojecttogoahead(forexample,throughautonomousregulatoryfortheopeningofthebiddingagencyprocess)ImplementingregulatoryrulesSettingatimetablefortheproject.Supervisingandmonitoring

Enforcingrules(forexample,Enablingandsupportingmeasuresimposingpenalties).Grantingpermitsandothernecessaryauthorizations(suchasrightsofwayandenvironmentalpermits)Determiningtheformofgovernmentsupportfortheproject.


46/243

Source:Kerfandothers(1998).


47/243


somediscretionwhileprovidingconcessionaireswithsomerecourseandappealintheeventofperceivedinappropriaterequirements.Whatevertheapproach,allconcessionsrequireoversightandsometypeofregulation.

HowDoConcessionsDifferfromPrivatizations?

Althoughconcessionsandprivatizationstendtoachievethesameobjectivessecuringprivatesectormanagerialandoperationalexpertiseandinvestmentstheydifferinthreekeyrespects.First,concessionsdonotinvolvethesaleortransferofownershipofphysicalassets,onlyoftherighttousetheassetsandtooperatetheenterprise.Second,concessioncontractsareforalimitedperiodusually1530years,dependingonthecontextandsector.Finally,thegovernment,asowneroftheassets,retainsmuchcloserinvolvementandoversightinconcessions.

Thesedifferenceshaveanumberofimplications,butperhapsthemostimportantisthattheconcessionairesonlyassetistherighttorevenuethecashflowfromcustomersforthelifeoftheconcession.Moreover,thatassetsvalueisuncertainbecauseofnaturalvariationsindemandandtariffsandbecauseofthepossibilityofearlycontractterminationbythegovernment.(Nearlyeveryconcessioncontractcontainsaclausegranting

thegovernmenttherighttocanceltheconcessionundercertainconditions,withorwithoutsomeagreementoncompensationforsuchaction.)Butthatrevenueistheonlyassetanoperatorcanpledgeagainstaloan:noland,plants,ormachinerycanbepledgedbecauseallphysicalassetsremainstateproperty.Intheeventofearlycontracttermination,lendersoftenhavenorightstorevenuegeneratedduringtheremainderoftheoriginalconcession.Theseshortcomings,intrinsictoconcessions,increaserisks,raisecapitalcosts,andaffectfinancingterms.

ForfinancingBOTprojects,anotherissuecanalsoaffectthecostofcapital:thesingle-buyerrisk.Anydebtwillusuallybesecuredagainstthevalueofthecontracttosupplytheservices,notagainsttheassetsofthecontractor.

Thus,theappraisaloftheprojectscreditriskwilldependprimarilyonwhethertheultimatepurchaseriscreditworthyandonthecontractualarrangementsforguaranteeingpayment.Avarietyofarrangementstomitigatethisriskcanandhavebeenused,forexample,escrowaccountsforaportionofrevenuesforservices.Noneofthesearrangementscangetaroundthedifficultiesofdealingwithanearlyinsolventutilitywhosetariffsaretooloworwhichisdramaticallyinefficient.AndindeedtheexperienceinMexicowithBOTinthewatersectorhasseenanumberofsuchtypeofproblems.Insuchcases,thegovernmentownsthatcompanythatwillbe


48/243


theultimateborrower(viaguaranteeorotherprovisions),inwhichcasetheBOTcontractisnomorethanacombinationofagovernment-guaranteedloanwithaperformancecontract.Thisarrangementwillnotsolvetheproblemsfacedbygovernmentsthatarenotcreditworthyandunabletofinanceinvestmentsinextendinginfrastructureservice.

BenefitsofConcessions

Concessionsof(quasi)naturalmonopoliesofferseveraladvantages.First,theyallowprivateparticipationinsectorsinwhichprivateownershipisconstitutionally,legally,orpoliticallyuntenable.Second,ifawardedcompetitively(whichtendstobethecase),concessionsenablecompetitionforthemarket(asopposedtocompetitioninthemarket)andoughttodissipatemonopolyrentsensuringthemostefficientoperatorand,inprinciple,facilitatingregulatoryoversight.Third,concessionscanencouragecostefficiency,particularlywhengrantedunderprice-capregulationorrateof-returnregulationifcostreferentialbenchmarksareused.Underpricecapregulation,concessioncontractsspecifymaximumpricesforsetquantitiesofgoodsorservices,permittingcostsavingstoaccruetotheconcessionaire,atleastbetweentariffreviews.Finally,concessionscan

achieveoptimalpricingevenwhensunkcostsruleoutcontestability,be-causecompetitionoccursbeforefirmscommittoinvestmentprograms.

DrawbacksofConcessions

Disadvantagesofconcessionsincludetheneedforcomplexdesignandmonitoringsystemswhenmultipletargetsareinvolved,theinabilitytocovereveryconceivablecontingency,thedifficultyinenforcingcontracts(andlimitingincentivestorenegotiate),theneedtoaccountforpoorservicequality,andthelackofinvestmentincentivestowardtheendoftheconcessionperiodbecauseofthefixed-termnatureofcontractsandtheinabilitytocommittopriceadjustmentsoverthelifeoftheconcession.Governmentsinabilitytobecredibleinitscommitmenttonorenegotiation

createsopportunitiestouseandabuserenegotiation,raisingdoubtsabouttheinitialpricebidonwhichaconcessionisawarded(Mueller2001;Spiller1993).

Incentivesforconcessionairestomaintaintransferredassetsproperlycanbestrengthenedbycompensatingthemattheendoftheconcessionperiodwithanamountlinkedtothewinningbidforthenextconcessionperiodortoinvestmentsnotyetdepreciated.Biddingforconcessionsremainsan


49/243


attractiveapproachifproperlydesignedandifabusesaftertheawardarecontained,enforcementisappropriate,and(especially)ifrepeatedbiddingispractical.

ConcessionandRegulatoryDesign

Effectivesectorperformanceisdrivenbyproperconcessionandregulatorydesign,andbotharesomehowintertwined.Concessiondesignmeanstheawardprocess,theawardcriteria,prequalificationrequirements,ownershiprestrictions,laborforceadjustmentissues,investmentobligationsversusoutputtargets,guarantees,concessionlength,terminationclausesandcompensationrules,contingencyclauses,performancebonds,conflictresolutionmechanismsandappealsstructure,allocationofrisks,andsoforth.Regulatoryframeworkmeanschoiceofregulatoryregime(rateofreturnversuspricecap),tariffstructure,adjustmentoftariffproceduresandtriggers,ordinaryandextraordinarytariffreviews,valuationofassets,costallocation,assetbase,qualityofservicestandards,informationalrequirements,regulatoryaccounting,regulatoryinstruments,penaltiesandfees,consumerrights,servicestoberegulated,andallthathastodowiththestructure,organization,andprocedureswiththeregulatoryagency.Both

arerelated,andindeedsomegrayareasexistwheretheconceptcouldbeconsideredpartoftheconcessiondesignorpartoftheregulatoryframework.


50/243


51/243


RenegotiationIncidenceandIncidents

Renegotiationoccurswhentheoriginalcontractandfinancialimpactofaconcessioncontractissignificantlyalteredandsuchchangeswerenottheresultofcontingenciesspelledoutinthecontract.Forexample,statedandstandardtariffadjustmentsresultingfrominflationorotherstateddriversdonotcountasrenegotiation.Nordoperiodictariffreviewsstipulatedinacontract,orcontingencies(suchassignificantdevaluations)inacontractthatinducestariffchanges.Onlywhensubstantialdeparturesfromtheoriginalcontractoccurredandthecontractisamendedcanonesaythatarenegotiationtookplace.

Excludingthetelecommunicationssector(whichisfarlesssubjecttorenegotiation,mostlybecauseofthesectorshighercompetitivenessandavailabilityofpotentialnewentrants,andwhichwasprivatizedratherthanconcessioned),morethan41percentofinfrastructureconcessionsinLatinAmericaandtheCaribbeanhavebeenrenegotiated.Thehardesthitsectorshavebeenthetransportationsectorandthewaterandsanitationsectorwithrenegotiationincidenceof55and75percent,respectively.Ofadditionalconcernhasbeentheveryfasttimingforrenegotiation.Thetimebetweenthestartofoperationsandtherenegotiationofcontractshasaveraged

about2years,despiteoriginalcontractagreementsof2030years.Moreover,thisestimatedincidenceofrenegotiationislikelyanunderestimatebecausetheprocessisongoing,andinthenextfewyearsadditionalconcessionswilllikelyberenegotiated.

Inprinciple,renegotiationcanbeapositiveinstrumentwhenitaddressestheinherentlyincompletenatureofconcessioncontracts.Properlyused,renegotiationcanenhancewelfare.Althoughsomerenegotiationisdesirable,appropriate,andtobeexpected,thishighincidenceexceedsexpectedandreasonablelevelsandraisesconcernsaboutthevalidityoftheconcessionmodel.Itmightevenindicateexcessivelyopportunisticbehaviorbynewoperatorsorbygovernments.Suchbehaviorunderminedtheefficiencyoftheprocessandtheoverallwelfare,becauserenegotiationtakesplace

betweengovernmentandtheoperatoronly,soitisnotsubjecttocompetitivepressuresandtheirassociateddiscipline.Whenusedopportunisticallyorstrategicallybyanoperatororgovernment,tosecureadditionalbenefits,andnotdrivenbytheincompletenessofacontract,renegotiationcanunderminetheintegrityofaconcessionandreducewelfareandthreatenthedesiredstructuralreformprogramininfrastructure.Thehighincidenceofnegotiationreportedhereshouldindeedbeacauseofconcern.

Renegotiation,particularlyopportunisticrenegotiation,canreduceoreliminatetheexpectedbenefitsofcompetitivebidding.Iftheauctionis


52/243

ConcessionsandtheProblemofRenegotiation35

designedwellandprovidesadequateincentives,competitivebiddingfortherighttooperateaconcessionforagivennumberofyearsshouldelicitthemostefficientoperator.Ifbiddersbelievethatrenegotiationisfeasibleandlikely,however,theirstrategicbehaviorandtheirbidswillbeeffected,andtheprocesswillnotbelikelytoselectthemostefficientoperatorasintended.

Insuchanenvironmenttwoelementsplaymajorrolesindeterminingthebidsofoperators,asidefromhowefficienttheyareinprovidingtheserviceandwhatinformationtheyhaveabouttheconcession.Thefirstelementistheoperatorsassessmentofthelikelihoodofrenegotiation;thesecondistheoperatorsassessmentoftheirownabilitytorenegotiate.Ifbothassessmentsarepositive,operatorsbidtosecureaconcession.Then,iftheywinthecontract,theyrequestarenegotiationwiththegovernmenttosecurebetterterms.Thisapproachdistortsthecompetitiveprocess,becausethewinningoperatormaybetheonemostskilledinrenegotiationortheonemostoptimisticaboutitslikelihood,ratherthantheonemostefficientparticularlyifthegovernmentcannotcrediblycommittoapolicyofnorenegotiationasitisintended.

Finallyanotheradversefactorofrenegotiationsistheaddedcostsand

dead-weightwelfarelossesitinduces.Theprocessofrenegotiationscanbefairlylongandcostlyonbothsides,thatoftheoperatorandthatoftheregulatororgovernment.Itrequiresafairamountofinformationgatheringandanalysisandtherunningofcostsandfinancialmodels.Itoftenlaststhreetotwelvemonthsandcantieuptheregulatorslimitedresourceshumanandotherwiseforthatentireperiod,attheexpenseoftheothertasksandoperationstheregulatorisresponsiblefor.Forrenegotiationsinwhichaclearwelfarebenefitisevident,thetradeoffsmightbewarranted,butforopportunisticonesaimingatbest,atredistributionofresourcestheimpactofthosecostsandlockingthoseresourcescanbequitedamaging.

ThePrincipleofFinancialEquilibriuminRegulatedMarkets:MoreRegulation,MoreRenegotiation

Almostbydefinition,certainfeaturesofregulatedsectorsmakethemmorepronetorenegotiation.First,regulationconstrainstheactionsthataconcessionairecantake,themostimportantbeingthesettingoftariffs.Second,tariffsareexpectedtobesetsothattheyallowtheconcessionairetoearnreasonableprofits.Whenfirmsarenotabletoearnexpectedreturns,theyexpect,logicallyenough,achangeincontractterms.Thispremiseisbehind


53/243


theso-calledfinancialequilibriumclauseimplicitorexplicitinmostconcessionservicecontractsandlegislation.Thatclauseis,inprinciple,avalidpillarofanyconcessioncontract,becauseprivateinvestorsshouldbeallowedtoearnafairrateofreturnontheirinvestments.Nevertheless,thefinancialequilibriumalsooughttobesubjecttoanumberofprovisos,includingaconditioningtocost-efficientoperation.Yetthecostsofprovidingservicesarerarelylinkedtoabenchmarkofefficientoperations,andwhentheyare,suchcostsareoftendisputed.

Thefollowingequationoffersasimplifiedrepresentationoffinancialequilibrium,whererevenuesminuscostsshouldprovidetheappropriatereturnoninvestment:

R=PQOCTD=rKi,

whereRisprofits,Pispricesortariffs,Qisquantityoroutput,OCisoperationandmaintenancecosts,Tistaxes,Disdepreciation,ristheopportunitycostofcapital,andKiisinvestedcapital.Iftheawardcriterionisa

transferfee,itappearsunderKi.Ifitisthelowesttariff,itappearsunderP.Inprinciple,anyappropriatebid,whetherbasedonKorP,hasbehinditananalysisthatbalancesthisequation.

Astrategicoropportunisticbidis,presumably,oneinwhichthelefthandsideoftheequation(profits)islessthantheright-handside(returnstocapital).Herestrategic,opportunistic,oraggressivebiddingreferstobidsthatdonotprovidefirmswithfinancialequilibriumthatis,thecostsofsubmittedbidsexceedrevenues.Thatis,biddingatransferfeeoratariffsuchthat

R=PQOCTD


54/243


Strategicunderbidding(oroverbidding,dependingonawardcriteria),tosomeextentencouragedbytheincompletenessofcontracts,alsomayexplainthehighproportionofrenegotiation.Asnoted,manyfirmshavewonconcessioncontractsbystrategicallyunderbidding(oroverbidding),withtheexpectationthattheywouldbeabletorenegotiateinthefuture,andgovernmentshaveoftenbeenunabletocommittoenforcingtheseagreements.Ifallpotentialbiddersaccountforthatpossibility,anauctioncouldstillelicitthemostefficientoperatorbutwithsignificantunderbidsoroverbids.Thatargumenthastwoproblems,however.First,becauserenegotiationisabilateralnegotiation,thefinaloutcomeneednotbeguidedbyefficiencyandwelfareconcerns,andrentscouldbetransferred.Second,althoughanypotentialoperatorcouldsubmitabidwiththeexpectationofrenegotiation,expectationsmightvaryamongbiddersandnotnecessarilybecorrelatedwiththeirefficiency.Moreover,someenterprisesmaypossessasystematicadvantageinrenegotiationandsobemorelikelytowinaconcessionthroughunderbidding(oroverbidding).Asaresultafirmwithhighaffiliationandhighcostscouldwinanauction.

Guasch,Kartacheva,andQuesada(2000)developthisframeworkand

showtheequilibriumstrategytobeofthatnature.Withtheothercompetitorsgone,renegotiationthenoccursinanoncompetitiveatmosphere,andtheoperatorandthegovernmentengageinbilateralrenegotiation.Insuchnegotiationsgovernmentsareofteninadisadvantagedpositionthatgrantssignificantleveragetotheoperators,enablingtheoperatorstoimprovetheirpositions(capturemorerents)relativetotheiroriginalbids.

Bidding,Renegotiation,andGovernmentResponses:SanctityoftheBid

Inaregulatedenvironmentwherefirmsarenotfreetoadjustpriceshowevertheyseefit,andintheeventofadverseeconomicconditionsthatdonotallowthemtoearnexpectedreturns,expectingachangeincontract

termstorestoreprofitabilitythatis,renegotiationisrational.Thusfirmsseekingconcessionrightsmightlogicallysubmittheirmostoptimisticbids,withtheexpectationthatifthingsdonotturnoutwelltheycanrenegotiatethetermsofthecontract,drawingonthefinancialequilibriumclause.Butwhatifafirmsubmitsanunreasonablebid,onethathasaveryhightransferfeeorverylowtariff,andthen,asexpected,thefinancialequationdoesnothold?Shouldthefirmbeheldaccountabletoitsbid,orshouldthefirmbebailedout?


55/243


Therightansweristhat,barringmajorexternalfactors,operatorsshouldbeheldaccountabletotheirbids,andifpetitionsforrenegotiationareturneddown,operatorsoughttofeelfreetoabandontheprojects,iftheychoosetodoso(withthecorrespondingpenalties).Theappropriatebehaviorforgovernmentistoupholdthesanctityofthebidandnotconcedetoopportunisticrequestsforrenegotiation.Doingsomayleadtotheabandonmentofaconcession,butthatisapriceworthpayingand,infact,canhelpgovernmentestablishareputationofnotbeingeasyintermsofrenegotiationdemandsand,indoingso,woulddiscouragefutureaggressivebids.

Whatshouldbedonemoreoftenisforgovernmentstorejectopportunisticrequestsforrenegotiationand,insuchcases,allowconcessionstofail.Suchoutcomeswouldreducetheincidenceofrenegotiation.Thatisakeyissueinprivateconcessionsofinfrastructureservicesyetonethatisoftenresolvedinfavorofoperators.Thusaggressivebiddingandthehighincidenceofrenegotiationshouldnotbesurprising.

Butgovernmentshavehadahardtimeadoptingthatstrategy,because

acceptingconcessionfailuresbringspoliticalcosts.Yet,althoughcancellationsandrenationalizationsofprivateinfrastructureprojectsattractheadlines,theyhavebeenrelativelyuncommon.Ofthe2,485privateinfrastructureprojectsconcludedin19902001,just48lessthan2percentsawtheexitoftheprivatesector(box3.1).Suchdata,however,maysimplyindicatethatgovernmentshavebeenunabletocommittoapolicyofnorenegotiationandhaveconcededtoopportunisticrenegotiation.

Manygovernmentshaveconcededrentstooperatorsduringopportunisticrenegotiationswhenitwouldhavebeenmoreappropriatetohold

Box3.1AnOverviewofCanceledPrivateInfrastructureProjects

Worldwide,outofatotalof2,485projectsgrantedin19902001,48privateinfrastructureprojectswerecanceledwithtotalinvestmentcommitmentsofUS$19.8billion.Ofthese,19weretollroads(allinMexico),9wereenergyprojects(allbut1inelectricity),7werewaterandsanitationprojects,8weretelecommunicationsprojects,andtherestwereintransportationsectorsotherthantollroads.Thehighestincidenceofcancellationbysectoroccurredintollroads,where5.8percentofprojectswerecanceled,andwaterandsanitation,where3.5percentofprojectssawtheexitoftheprivatesector.

Source:Harris(2002).


56/243


theoperatorstotheirinitialbidseventhoughintheshortterm,beforeagovernmentestablishesareputationfornotconcedingtoopportunisticrenegotiation,suchanapproachwouldincreasethenumberofabandonedconcessions.Thusitcouldbearguedthattheincidenceofabandonedconcessionshasperhapsnotbeenhighenoughtoestablishaneededreputationsignalingacrediblecommitmenttoapolicyofnoopportunisticrenegotiationandthustoreachthesteady-stategoodequilibriumofmuchlimitedrenegotiationdemandandincidence.

Asecondbest,butdifficult,approachforgovernmentistorejectaggressivebids.Butthatisseldomdone.Indeed,suchbidsarecelebratedasasignthatgovernmenthassecuredaveryhightransferfeeorverylowtariff.Paradoxically,evenwell-meaninggovernmentsmightavoiddisqualifyingaggressiveoffersforfearofbeingaccusedofcorruptionorfavoritism.Forexample,forawaterconcessioninaLatinAmericancountry,thebestofferhadatransferfeethatwasseveraltimesthesecondbestoffer.Yeteventhoughthebiddingdocumentsallowedthegovernmenttodisqualifyhighlyaggressiveoffers,forthereasonsjustexplained,thegovernmentacceptedthebestoffer.Shortlyafterthecontractwasawarded,

theoperatorrequestedarenegotiationandeventuallytheconcessionwasabandoned.

Giventhatrenegotiationrequestsareoftenacceptedandresolvedinfavorofconcessionaires,aggressivebiddingandfrequentrenegotiationdemandsshouldnotbesurprisingThussubmittingtheirmostoptimisticbidsforconcessions,withtheexpectationthatifthingsdonotturnoutwell,theywillbeabletorenegotiatethetermsofthecontract,oftenmakessenseforfirms.Financialequilibriumimbalance,however,canbeclaimed,andusuallyis,atanytimeandindependentofhavingsubmittedafinanciallynonviablebid.Theinformationalasymmetriesoncostsmakesproperlyevaluatingthoserequestsdifficultforgovernmentsandcreatesincentivesforfirmstoarguefinancialimbalance.

TheCaseofDirectlyAdjudicatedConcessions

Oneinterestingempiricalregularityfromthedatacollectedprovidesadditionalsupporttotherent-seekingthesis:thelowincidenceofrenegotiationabout8percentonconcessionsgrantednotthroughcompetitivebiddingbutthroughdirectadjudicationorbilateralnegotiationbetweenthegovernmentandasingleoperator,asaresultofgovernmentinvitationoroperatorrequest.Aplausibleexplanationforthatlowrenegotiationincidenceisthatanyrentstobecapturedweresecuredthroughthe


57/243


initialbilateralnegotiation,reducingoreliminatingtheneedforopportunisticoperatorbehavioraftertheconcessionisawarded.Moreover,thelackofcompetitionmightruleoutquestionable(thatis,financiallyunsustainable)bids.

Indirectadjudicationofconcession,anyrenegotiationusuallycomesfromanewadministration,questioningasweetdealgrantedbythepreviousadministration,orfromthesameadministrationwithdifferentpriorities.Examplesincludepowerpurchaseagreementswithindependentpowerproducersinvariouscountriesandroadconcessionsinacouplecountries.

Thelowerincidenceofrenegotiationindirectlyadjudicatedconcessionsshouldnotbeinterpretedasanendorsementofthatprocess.Tothecontrary,itshowstheproblemswiththatprocessrentcapture,opportunitiesforcorruptionandindicatesthatitshouldnotbeused.Government-ledrenegotiationalsoraisesquestionsaboutcompetition.1Operatorscanaccountfortheriskofrenegotiationintheirbids,againpossiblyleadingtotheselectionnotofthemostefficientoperator,buttheonebestabletobear

therisk.Theresultwillbeacontaminatedprocessthathashigherregulatoryrisk,translatingintohighercapitalcostsandhighertariffs.Thusgovernment-ledcanbeasdamagingasoperator-ledrenegotiation.

OtherDriversofRenegotiation

Governmentsalsoholdsomeblameformanyproblemswithconcessions.Governmentshaveoftenbehavedopportunisticallyandinterferedwithcontractclausesforcingrenegotiation,cuttingtariffsunilaterally,notauthorizingtariffincreasesallowedinthecontract,andsoon.Indeed,nearly30percentofrenegotiationsareinitiatedbygovernments.Whilesomeoftherenegotiationsmightbedesirable,fromawelfarestandpoint,ifnotdrivenbycontingencies

expressedinthecontract,suchactionscandamagetheinstitutionalityandcredibilityoftheprocess.Althoughenvisioningtheeradicationofgovernmentinfluenceonregulatorydecisionsishard,properlydesignedconcessionsandregulationsshoulddetersuchbehavior.

Poorconcessiondesignriddledwithambiguitiesalsoopensthedoorsforrenegotiationdemands.Thereasonsforpoorconcessiondesignshave

1.Relativetodirectadjudication,concessionsawardedthroughcompetitivebiddingentailsystematiccostreductionsofmorethan20percent(Dornberger,Meadowcroft,andThompson1986).


58/243


variedfrompoliticalcyclestopurecarelessnesstomisalignedincentivestolackofunderstandingofkeydeterminants,andperhapsdrivenbyvestedinterestssoastoopenpossibilitiesforcapturingsupranormalrents.Politicalconstraintscouldbeviewedastimeconstraints:thedesiretoaccomplishtoomuchintoolittletime(thedurationoftheadministration).InmanyLatinAmericancountries(Argentina,Brazil,Mexico,andPeru)atthestartoftheprocess,constitutionsforbadeimmediatereelectionofsittingpresidents.2Thusconcessionswereoftenawardedhastily.

Theclusteringofconcessionawardswithinafewyearssupportsthathypothesis.Reformgovernmentshavefearedthattheyhadlimitedwindowsofopportunitytomaketheirpolicychangesirreversibleandsohaveawardedconcessionsinanumberofsectorsalmostsimultaneouslywithouttakingsufficienttimetodesignthecontractsappropriatelyandtosetandimplementappropriateregulatoryframeworks.Someeffortshaveemphasizedspeed,leavingasideacquisitionofinformationaboutmarketsandspecificationofcontingenciesincontracts.Suchshortcomingsandcontractsthatwerenotwatertightaddtotheincompletenessofcontractsandincreaseopportunitiesforrenegotiation.

Inadditiontheintrinsicinformationalasymmetriesoncostsbetweentheoperatorandtheregulatorprovideincentivesforopportunisticdemandsforrenegotiation.Evenifthebidisproperandnotopportunisticinthesensedescribedabove,downtheroad,operatorscanclaimcostincreases,drivenbyanumberoffactors,thatunbalancetheirfinancialequilibriumandthusrequestincreasesintariffstorestorethatequilibrium.Theanchorofallthoseclaimsistheusualclauseoffinancialequilibriuminconcessioncontracts.Thusdescribinginthecontractthecontextandapplicabilityofthatclausewithspecificcontingenciesasmuchaspossibleisofforemostimportanceandshouldnotbeusedtoallowjustanycostincreasesordemanddecreasestojustifyatariffincreaserequest.Iftheenvironmentisconducivetorenegotiation,thoserequestsareboundtoproliferatewithall

theiraddedcostsandimplications.

Finally,macroeconomicshocksalsobearsomeoftheblameforrenegotiation.Exchangerateriskisamajorfactorbecauseprojectrevenueisusuallydenominatedinlocalcurrency,andfinancingisusuallyinforeign

2.YetinthreeofthosecountriesArgentina,Brazil,andPerulateintheirelectedperiodsgovernmentswereabletopassconstitutionalamendmentsthatpermittedimmediatereelectionandthethreepresidentswereelectedforsecondterms.


59/243


currency.SuchproblemsoccurredinMexicoin199495,inBrazilinthelate1990s,andespeciallyinArgentinainlate2001,wheredevaluationledtomajorproblemsandrenegotiationsinalmostallofthecountrysconcessions.Althoughoperatorsandinsomecasesgovernmentscandolittletopreventsuchshocks,clearcontractguidelinesshouldindicatewhatlevelofchangestriggersanadjustmentandhowtoproceedandrenegotiateundersuchconditions.Thoseguidelines,alongwiththeuseofexistingfinancialhedginginstruments,canprovidesomecomfortanddecreaseregulatoryriskforinvestors(Guasch2003).


60/243

AnecdotalEvidenceoftheDriversofRenegotiation

Inthebroadsense,problemswithconcessionsoccurwhenefficientperformanceasreflectedinservicecosts,access,quality,andoperatorreturnsisunderminedbypoordecisionsandactionsatthedesignstageorafterthecontractaward.Poordecisions,ambiguities,andactionsatthedesignstagecanleadtounnecessarilyhightariffsorsetthestageforconflictsdowntheroad.Poordecisionsandactionsafterthecontractawardareproblematicwhentheyimprove(orworsen)thefinancialtermsfortheoperatoroverthetermsagreeduponatthebiddingstage,throughbilateralrenegotiationbetweenthewinneroperatorandthegovernment.

Inaddition,improperregulatoryframeworkandpoorregulatoryoversightincreasesthechancesofconflict,rentcapt

Documents

Luis Guash Granting and Infrastructure Concessions