The lack of resources for studies led to an informal and illegal arrangement by which the private sector would pay for the studies as well as for additional compensation to the professional cadres within the PPP office.<sup>38</sup> Of course this sort of arrangement, even if initially innocent, can easily lead to corruption. The scandal that ensued was known as the MOP-GATE scandal because the firm that made the illegal payments, Gestión Ambiental y Territorial, went under the acronym GATE. During this period, the PPP program had grown quickly first with the development of additional interurban highways and then urban highways (approximately USD 2.8Bn in projects in 2000-2002).<sup>39</sup> After this period, there were few PPP projects, in part because of the scandal, but also because the ousted Minister had spent several years of future VAT budgets (personal communication, E. Bitrán, former Minister of Public Works, see below on the timing of expenditures).

Since the mid-2000s, the Ministry of Public Works has used private initiatives to develop new projects. Rather than its intended use in the Law as a means of adding creative and socially beneficial projects, the prizes associated to accepted private projects were used to compensate the private party for preparing a project that the Ministry wanted to develop. This meant that MOP had little oversight over the details of project design and that auctions were less competitive because the firm that did the study ran with an advantage. Also, often many years went by between the study and the beginning of construction. This led to projects being auctioned with dated studies which then required costly contract renegotiations.

All of this shows that the Finance Ministry was unable to design a system to control the growth of PPPs. By skimping on studies, this contributed to poorly designed projects that would later be renegotiated. In the end, the measure designed to control renegotiations itself led to renegotiations.

# _3.2.3 Traffic guarantees_

To be bankable, PPP projects with a fixed term required minimum revenue guarantees, that took the form of minimum traffic guarantees.<sup>40</sup> The strategy used by the Finance Ministry was to guarantee 70%-80% of expected traffic demand, corresponding to the desired leverage in PPPs. Thus, long term institutional lenders faced less risk, while the remaining risk was left to the PPP equity holder, who therefore was supposed to have skin in the game. These guarantees led to some contingent risks, and the Finance Ministry created an office to keep track of these and other contingent payments. However, due to strong economic growth in the period, the value of the contingent risks associated to PPPs never became large, not surpassing 0.25% of annual GDP, and the annual outlays were much smaller.<sup>41</sup>

> 38 To stop the drain of these highly qualified professionals to the private sector.

> 39 From Engel, Fischer, Galetovic and Hermosilla (2009).

> 40 These are not usually needed in the case of PVR contracts. For more information about the financial arrangements in PPPs, see Engel et al (2020). In principle, projects could be bankable without insurance if they used more equity. However, equity is expensive, so the required return on projects would need to be much higher.

> 41 See the annual _Reporte de Contingencias_ , Ministerio de Hacienda. Only in two PPPs were guarantees ever paid: Santiago-Los Vilos and Red Litoral Central, and then only for a few years. Since the guarantee also limits the upside, in many concessions the State may eventually receive payments from some PPPs (D. Duarte, personal communication).

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