# **Appendix: Estimating the Internal Rate of Return and Return to Capital for Chilean Concessions**

# **A. Data**

We obtained the Financial Statements for the concession companies, from 2001 onwards, from the website of the Financial Market Commission (CMF, by its acronym in Spanish). For years prior to 2000, we requested the information from the CMF by the Chilean equivalent of the Freedom of Information Act.

Financial Statements include information on firms’ Balance Sheets, Income Statements and Cash Flow Statements. Cash Flow Statements present all cash inflows and outflows during the year, classifying them into three categories: Operative, Investment and Financing. Operative cash flows are the inflows and outflows associated with the activities necessary to produce net income, i.e. the operation of the project. Investment cash flows include transactions associated with the acquisition and sale of long-term assets related to the project. The financing flows contemplate the activities necessary to raise money, via debt or equity, and the payment of these liabilities. To calculate the IRR, we used the Net Operative cash flows, without considering interest payments, and Net Investment cash flows. These are cash flows associated with the concession’s income, and therefore, its profitability. We define Net Cash Flow in year as: = ( OP − INTP ) + INV tt where OP is the Net Operative cash flow, INTP is interest payments listed as operative flow and INV is the net investment cash flow. We emphasize that these are net cash flows, and thus tt tt include cash inflows and outflows. tt Some judgement calls were needed to determine Net Cash Flows in our data. First, firms choose whether they present cash flows using the direct or the indirect method. These methods differ in how they record operative cash flows: the direct method reports cash inflows and outflows from operating activities, while the indirect method adjusts the period’s net income by adding changes in short-term assets and liabilities to determine the implied cash flow.

<mark>While the direct method allows us to identify the cash flow from interest payments related to operating activities, the main challenge is to obtain interest payments when firms use the indirect method. In this case, interest payments cannot be identified because they are lumped together with other outflows under operational flows. We used financial costs as a</mark> _<mark>proxy</mark>_ <mark>for interest payments reported under this method.</mark> <mark>Second, the financial statements prior to 2000 do not include Cash Flow Statements. We describe next how we built flow statements from the information available for these years.</mark> <mark>We constructed the cash flows under the indirect method from the variations in the balance sheet. We used a common criterion for all concessions to define cash and operating, investing and financing cash flows, based on the following accounting identity:</mark> <mark>where the right hand terms are Net Operative, Investment and Financing Cash Flows respectively, and Π We assigned the available information to the different kinds of flows as follows:</mark> tt<sup><mark>is an inflation-correction factor.</mark></sup>

- Cash: Current Assets on Hand, Short-term Deposits, Negotiable Securities and noncategorized current assets (listed as "Other Current Assets").

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