The second change was that PVR contracts began to be routinely used in the late 2000s, before the change of the law by the Ministry of Public Works and since then have become the main means of procuring transport PPPs. This provided an efficient allocation of demand risk to the public.

The third relevant change required that any significant additional works must be procured in a competitive auction under the supervision of the Public Authority.<sup>6</sup> This means that the PPP no longer has an interest in pressuring for additional works through renegotiations.

We find evidence suggesting that renegotiations are significantly lower with the new law. Projects tendered under the new law are renegotiated less frequently and for smaller amounts at similar stages in their lifecycle. In addition, we find evidence suggesting that PVR contracts are renegotiated less, even under the pre-reform law. The lack of renegotiations suggests that risks are shifted to a larger extent to concessionaires, and off the public budget.

We also provide estimates of ex post internal rates of returns (IRRs) for highway and airport PPPs in Chile. Ex post IRRs can inform about the cost to society and profitability of PPP projects. We find that the average IRR of PPPs in Chile is 6.8 percent (median 7.5 percent), These values lie in the lower range of the 7 -10% returns on assets obtained in Chile by regulated industries such as electricity transmission and distribution, and water utilities. Interestingly, ex-post IRRs of PVR concessions are significantly lower than IRRs of fixed-term concessions. Also, a robustness check we performed suggests IRRs may be a couple of percentage points higher, in line with the average estimate from a survey of 24 experts we conducted.

We also find that there is a large dispersion in the IRRs of individual projects, ranging from ‒23 percent to 25 percent, with seven PPPs with negative IRRs. This suggests that public infrastructure projects are intrinsically risky, and that private participation entails significant risk shifting from the budget to concessionaires and their financiers.

The rest of the paper proceeds as follows. In section 2 we develop a conceptual framework to think about fiscal risks. In section 3 we present the history of Chilean PPPs, with an emphasis on the management of fiscal risks. In section 4 we present the estimation of the ex-post IRR of PPPs. Section 5 concludes.

# **2 PPPs and fiscal risks: A conceptual framework**

In this section we develop a simple framework that identifies the sources of fiscal risks in PPPs.

# <u>2.1 Risk and infrastructure</u>

Though it might sound like a platitude, the origin of the fiscal risks brought about by PPPs lies in the fact that infrastructure projects are risky (see our analysis of Chilean PPP project returns in section 3). It is useful, therefore, to start by showing that the risk added to the economy by a public infrastructure project does not depend on the procurement mechanism. To a first approximation, a new infrastructure project creates a fixed amount of risk, distributed between the public budget and the parties that finance the PPP, i.e., debt and equity holders.<sup>7</sup>

> 6 The concessionaire or a related party can perform the additional works only if they offer a price that is lower than the lowest price obtained in the competitive auction. In addition, the concessionaire is entitled to an administration fee for supervising the construction of the additional works.

> 7 That is, if we exclude the incentive effects of PPPs.

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