# _3.2.4. The timing of fiscal expenditures_

PPPs affect not only the level of fiscal expenditures, but also their timing.<sup>44</sup> There are at least five items that affect the timing of disbursements:

1. Expropriations. Since the expropriation expenditures by the private party are capped, any underestimate of these costs becomes an expenditure for the public purse. In a period of intense PPP activity (1998-2001), this was the main source of expenditures by the concession unit.

2. VAT outlays depend on the timing of construction expenditures. Efficient construction can accelerate VAT payments by the MOP. Similarly, since VAT is paid on maintenance and operating expenditures, a successful PPP can increase these expenses.

3. Subsidies (in case the project requires them) are paid when the project begins operations, so efficient construction can alter the timing of these expenditures.

4. There are expenditures associated to inspections, which are performed by specialized companies hired by the MOP. However, PPP contracts include a payment from the PPP to MOP for these estimated costs.

5. Any payments to the PPP due to contract renegotiations.

These items meant not only that the Concessions unit became an important source of expenditure for MOP, reaching 33% of all expenditures in 2005, but also that there is a lot of inertia in spending. The expenditure in subsidies and compensations, and specially renegotiations, represented the largest fraction of the concessions unit’s expenditure in 2005-2010. The disbursements for the period 1998-2008 exceeded the budget assignments by amounts that ranged from 14%-34% (except for 2003). This was one of the reasons for a dearth of important projects in 2003-2009.

# _3.2.5 Renegotiations before the 2010 reform_

The period between 1990 and 2010 of Chilean concessions program was characterized by frequent contract renegotiations, as we have mentioned. By 2006, there had been 3 renegotiations per PPP contract on average, adding up to USD 2.810 MM in renegotiated contracts (Engel et al., 2009). This means that the initially contracted amounts of approximately USD 8.460 MM had increased by one-third.

Some of these renegotiations were bilateral agreements, while others were the result of appeals to the Conciliation Commission by the private party. Contract renegotiations usually took the form of i) payments by the Ministry of Public Works (56% of renegotiated amounts, 47 of 78 bilateral renegotiations and 21 out of 30 conciliations or arbitrations),<sup>45</sup> ii) reduction in some investments in exchange for other additional investments agreed upon in bilateral renegotiations, and iii) the sacrifice by MOP of revenues. This took place by allowing early participation of the private party in toll revenues from public projects, by contract extensions (which delayed the time at which the State became the recipient of toll revenues) and by reductions in contracted payments to the MOP. After the 1997 Asian financial crisis, 7 concessions asked for and obtained relief by transforming the original fixed term contract to a variable term contract where they would be assured of the total (discounted) revenues from the contract, eliminating most of the

> 44 This section is adapted from MOP (2016): Concesiones de Obras Públicas de Chile: 20 años.

45 This explains why the Budget Office started including a 20% surcharge in their cost estimates of PPP projects. This reduced the number of PPPs that could be awarded as a result (D. Duarte, personal communication).

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