This is a summary of the activities undertaken by the IADB related to transportation infrastructure financing as requested the Western Hemispheric Transport Initiative (WHTI) requested.

Studies:

By Paulina Beato

The objective of this paper is to analyze some issues and challenges related to private toll road developments in Latin American countries, and explore new schemes to mitigate problems that often appear in road concessions.

By Paulina Beato

This article analyzes the reforms introduced in the "traditional" model of providing port services in Buenos Aires, Montevideo, y Valparaíso.

By Remy Cohen, Xavier Freixas, Robert Sheehy, José A. Trujillo

Concession schemes of the Build-Operate-Transfer (BOT) type for the development of infrastructure projects by the private sector are a means to address the shortage in public resources and the relative inefficiency of the public sector in the provision of certain services. However, such schemes have problems, which are aggravated in the case of emerging economies. The issues presented in this paper as problems affecting BOT mechanisms, and the proposals made based on unbundled schemes, refer to those projects where the required investment is relatively large in relation to the importance of the net cash flows generated by the infrastructure, after maintenance and operating costs. They also refer to projects whose revenues have a high degree of uncertainty. The paper argues that BOT schemes, defined by the concentration of all responsibilities (building, management and financing) in a unique private agent (or a joint venture of private agents) are inefficient in the case of projects with the mentioned characteristics (high relative investment and high uncertainty), and can be challenged on the grounds that the unbundling of these responsibilities is a more efficient alternative.

By Eduardo Engel, Ronald Fisher, Alexander Galetovic

Given the difficulties facing regulators in developing countries, a particularly promising approach for private participation is to auction infrastructure franchises. There are many well-known advantages to be gained from franchising infrastructure projects; unfortunately, there also are a number of important pitfalls that need to be avoided to obtain these advantages. In this paper, the authors argue that most of the pitfalls arise from the fixed duration of the normal franchise contract and propose a new auction mechanism in which the term of the franchise adjusts endogenously to demand. This mechanism, which they call Least Present Value of Revenue (LPVR) auction solves many of the problems that have hindered the use of fixed lower term franchises when privatizing infrastructure projects. First, the franchise holder bears a demand risk and, as a result, users pay lower fees. Second, LPVR auctions reduce the scope for opportunistic behavior, both by the franchise holder (lowballing) and by the government (creeping expropriation). Third, socially desirable changes to the original contract (such as user fees or capacity expansions) can be implemented at low cost.

Regulation and Contractual Adaptation in Public Utilities: The Case of Argentina

By Daniel Artana, Fernando Navajas, Santiago Urbiztondo

This paper evaluates a set of contractual adjustments, renegotiations and disputes that have taken place in Argentina since 1991, including the transportation sector. The approach considers different aspects:

• whether the decisions analyzed are inside the initial contract or represent a modification of it (i.e., are outside the initial contract)
• whether they were motivated by unexpected shocks (which were very difficult or even impossible to foresee), by loopholes in the initial contracts (ambiguities) which shouldn't have existed, or just responded to a contractual failure (holdup by one of the parties) to respect the initial contract
• the actors involved in the disputes and "production" of these innovations, i.e., the regulatory agencies, the ministries involved, the legislators, the industry associations and regulated firms, the consumer representatives and advocates, etc.
• how these disputes were resolved
• the solutions, which are evaluated in three dimensions: i) the degree of respect to the letter and spirit of the existing contract; ii) their effect on static and dynamic efficiency (in terms of welfare); and iii) the transfers between users and regulated firms, on the one hand, and among different types of users, on the other hand

By Federico Basañes, Eduardo Saavedra, Raimundo Soto

This paper analyzes a series of post-privatization disputes and renegotiations that have taken place in Chile since the late 1980s in the electricity sector. This sector was chosen because the privatization process was, to a large extent, completed a decade ago, providing enough time to properly evaluate renegotiations and disputes. The paper also assesses how the lessons learned in the reform of electricity were internalized in the design of the regulatory framework for highway concessions.

By the Infrastructure and Financial Markets Division.

This report provides a review of IDB Group activities supporting private participation in infrastructure.

By Antonio Vives

This Directory, the fourth one published, describes some of the most significant infrastructure finance transactions of 1998. It does not attempt to be comprehensive and includes only those deals that have a demonstration effect. As in past issues, even though we include deals from countries in Africa, Asia and Europe, the goal is to present as many cases as possible from Latin America and the Caribbean. The major users of this report are anticipated to be the officers and managers of the Inter-American Development Bank Group (IDB Group), and officers, sponsors and investors in the region. Nevertheless, the Directory is expected to be of help to other bilateral and multilateral institutions and sponsors, developers and financiers of private infrastructure.

The Directory includes all private infrastructure projects financed by the Inter-American Development Bank and the Inter-American Investment Corporation (IIC) during the year, as well as other trend-setting transactions. Project descriptions emphasize their special financial aspects, hoping to stimulate the search for more creative and effective financing structures, and a better understanding of the conditions that make a given financial instrument or structure possible.

This conference was held on June 3, 1997. The conference discussed problems of BOTs schemes for financing infrastructure projects in particular road projects. Problems deriving from sponsor’s opportunistic behavior, traffic risk and foreign exchange risk. The conference discussed other mechanisms for financing large projects with large initial investments. Unbundled mechanisms were analyzed. Two features distinguish these private sector mechanisms from traditional concession. First, financial responsibility and construction and management responsibility may relay on different entities. Second, the financial concession term may not be equal to management concession term.

Based on a series of examples from Latin American and Caribbean countries, the workshop participants discussed and analyzed the problems encountered as well as the solutions chosen during the transition to competition and private participation in public service provision, including transportation. The analysis focused on post-privatization disputes and renegotiations between governments and the private sector, and on the regulations implemented to promote competition.

© 2000 Executive Committee of the Western Hemisphere Transport Initiative, and, Office of Summit Follow-Up, Organization of American States.
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