Using PPPs to develop Chile’s infrastructure

In common with a number of developing nations, Chile found in the early 1990s that its infrastructure was not capable of supporting its growing economic activity. It applied the principles of public-private participation to its major construction projects, particularly in improving its previously failing road network.

The challenge

During the 1980s, the Chilean government failed to invest sufficiently on the country’s infrastructure, particularly its motorways. At the same time, the number of vehicles increased from nearly 900,000 in 1982 to more than 1.3 million ten years later, while traffic accidents nearly doubled.

By the early 1990s, the situation called for a significant level of investment, so the government of Chile had to decide how to find the necessary capital for roads and yet continue to put money into social improvements.

The initiative

The government opted for a concessions programme in order to renew all its infrastructure, including roads, ports and airports, to meet the demand resulting from Chile’s rapid economic growth. The programme applied the principles of public-private partnerships (PPPs) to the task, with the intention of improving the investment efficiency and management of its infrastructure projects. “The government responded by launching a programme under which concessionaires would finance highways and other infrastructure in the private capital markets. The programme was designed to boost investment in the country’s infrastructure without raising taxes or increasing public-sector debt, which were not politically viable options at the time.” [1]

The programme followed the classic principles of PPP, which were being applied throughout the world at the time. The Ministry of Public Works, in consultation with other agencies, was responsible for assessing the profitability of each project and, from its relationship with other infrastructure projects, whether it formed part of a coherent whole.

The Ministry of Finance evaluated the projects from a macroeconomic and debt sustainability perspective. As well as being politically and financially viable, it needed to meet the country’s social and environmental goals. Finally, “by law, all projects [had to] be awarded in competitive auctions open to domestic and foreign firms”. [2] The key provisions of the Chilean PPP legislative regime are set out in special decree no. 164 of 1991 (the “concessions law”), as amended by laws no. 19252 of 1993 and no. 19460 of 1996. (The applicable regulations are set forth in decrees no. 240 of 1991 and no. 956 of 1997.)

The public impact

The Chilean PPP infrastructure initiative was adjudged a success by the International Monetary Foundation (IMF) in 2004. “Since 1994, the government has engaged the private sector in 36 PPP projects with a total value of US$5.5 billion. The projects contracted thus far comprise 24 transport projects, nine airports, two prisons, and a reservoir. Over 20 of these projects are already in the operational phase.” [3] 

Between 1994 and 1998, projects worth USD3.3 billion were developed in Chile under PPPs, and this resulted in the construction of nearly 2,000 kilometres of roads. In 2014, the PPP programme was still viewed favourably, although with some reservations. “PPPs have worked well for ports and airports and, in Chile, for urban motorways with heavy traffic. But they should be a complement to, not a substitute for, public investment in roads, railways and metros.” [4]

What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Public Confidence Good

Civil society was supportive of the Chilean government: “the Chilean public demonstrated high levels of democratic attitudes and confidence in government institutions in the 1990s”. [6]

Stakeholder Engagement Strong

The PPP policy plan had broad-based support from politicians in the National Congress, the business and financial community, and the transport and construction industry. “A broad consensus existed on several key points, including the importance of upgrading infrastructure to meet the needs of exporters and other growing businesses; the need to preserve fiscal discipline without introducing new taxes; priority allocation of public expenditures to health, education, housing, and the alleviation of poverty; and the use of existing road budgets to maintain and rehabilitate secondary and tertiary systems.” [5]

Political Commitment Good

The PPP infrastructure programme was a government initiative which received broad support of the bicameral National Congress of Chile.

Policy

Clear Objectives Good

The broad objective of the PPP infrastructure programme was to boost investment in the country’s infrastructure without raising taxes or increasing public-sector debt (see The Initiative above). The detail was set out in the Concessions Law and associated legislation.

Evidence Good

Although the administration did not refer specifically to similar PPP programmes in other parts of the world, it was a well-established method of raising capital for infrastructure projects. The first phase was carried out as a pilot phase to understand the efficacy of the proposed policy initiative, and the findings were helpful in fine-tuning the policy. “The first phase of the intercity road concessions program began in 1992 as a pilot for testing the regulatory framework, contract forms, and bidding system.” [7] This framework was in place for each project procurement process. “Adequate procedures to identify, evaluate, and tender infrastructure projects have also been key for the success of the programme.” [8]

Feasibility Good

Each project proposal is fully evaluated from a financial and social perspective and must undergo an environmental assessment.

The legal framework introduced elements such as the special pledge and the issuance of bonds in domestic markets that facilitated the financing process. By introducing these special financial instruments to raise capital for carrying out the selected projects, the financially feasibility was enhanced. The legal framework also defines a rigorous contractual regime.

The Ministry of Public Works is responsible for supervising the construction, and must determine when the project has been completed in accordance with the specifications contained in the bidding documents. These specifications ensure the technical feasibility. The ministry can also imposed penalties on the concessionaire if they fail to meet the requirements of the contract.

Action

Management Strong

There was a sound institutional structure supporting the PPP programme. “The concessions programme is managed by the Ministry of Public Works... The ministry has the authority to delegate all or part of its functions through a system of competitive bids and to grant concessions for certain works. Under Chilean practices, bidding procedures and operations must be closely coordinated with the Ministry of Finance, including the preparation of bidding documents, prequalification of bidders, and award of concessions.” [9]

The Coordinación General de Concesiones was established as a separate agency within the Ministry of Public Works in 199 to manage the project design, bid process, the selection of concessionaires, and the supervision of concessions during construction and operations. It is structured as three main departments covering projects, construction, and operations, with units that provide support on legal, environmental, social and engineering issues. The Environmental Unit, for example, “provides advice on the resolution of environmental issues in projects and monitors concessionaires’ observance of environmental norms”. [10]

Measurement Strong

Measurement is approached in two ways, first in terms of the number of projects launched under the PPP route and secondly at the individual project level, where every single project is measured on its merit.

The effect of the policy was measured by the number of infrastructure projects using PPPs (24 transport projects by 2004). The bidding process is also carefully measured. “Each proposal is evaluated by an ad hoc committee using a scoring system based on technical design (20 percent), proposed operational approach (40 percent), and proposed toll system (40 percent). Proposals that fail to achieve a minimum score are dropped from further consideration.” [11]

Alignment Good

There was a good degree of alignment between the Chilean government and its agencies and the private sector organisations responsible for the financing and delivery of PPP infrastructure projects.

For example, the government was responsive to problems encountered by the banking sector. After it was clear that there are systemic problems in the Chile financial system, which inhibited capital uptake, the government introduced reforms in order to enable PPP infrastructure projects. When the programme was launched, it was assumed that most of its financing would come from the domestic financial market. The funds obtainable from Chilean banks are limited, however, by portfolio diversification regulations, which prohibit banks operating in Chile from investing more than 15 percent of their capital in greenfield infrastructure projects. “Other changes introduced to the Chilean financial regulations in 1995–96 were designed to facilitate the involvement of local banks and institutional investors in concession projects. One key modification to the banking law increased the limit on lending for infrastructure projects from 5 percent to 15 percent of the lender’s capital and reserves. The other significant change allowed pension funds and insurance companies to invest in bonds issued by companies that did not have an established track record. That reform made possible the issuance of ‘infrastructure bonds’ in the Chilean capital market.” [12]