once we note that the fraction of fixed term projects in this subsample (79%) is larger than this fraction in the entire sample of projects (62%).

Our second robustness check focuses on the possibility that SPVs are inflating their investment costs, which would bias the estimated IRRs downwards. This could happen, for example, if the concessionaire hires a company related to the owners of the SPV to build the road at an inflated price. To allow for this possibility, we replaced net investment costs with the MOP’s estimate of construction costs for construction years’ cash flow. We excluded all airport PPPs because they typically have small initial investments, making them closer to an Operations and Maintenance (O&M) contract than a PPP. We also excluded a highway PPP where the contract specifies significant investments after the project becomes operational, one highway where the investment was done in two stages, which results in an insufficient number of observations for this exercise, and one highway where MOP’s estimated budget does not correspond to the entire project.

Table 9 summarizes our findings. The left panel replicates the first three columns of Table 8 for the subset of projects considered. The right panel reports summary statistics when MOP estimates are used to proxy investments during construction. This time the difference is substantial. The mean and median of the IRRs increase by approximately 3 percent. This increase is larger for fixed term concessions (approximately 5%) than for PVR contracts (approximately 2%). This difference could be overestimating the actual bias in Table 8, since renegotiations during construction may lead to larger outlays than the value estimated by MOP. For this reason these estimates should be considered, informally, as an “upper bound” for the actual IRRs.

**Table 9 Estimated IRR: Replacing reported investment during construction by MOP estimates.**

||**(Rep**<br>|**Median Returns**<br>**orted Investment C**<br>|**osts)**|**(MOP**<br>|**Median Returns**<br>**’s Investment Estim**<br>|<br>**ates)**|
|---|---|---|---|---|---|---|
||**All**|**Fixed Term**|**PVRs**|**All**|**Fixed Term**|**PVRs**|
|Mean|7.4%|8.1%|6.5%|10.2%|11.8%|7.8%|
|Median|6.8%|7.1%|6.4%|9.9%|12.9%|8.5%|
|SD|4.1%|4.8%|2.7%|5.5%|5.7%|4.3%|
|25% Quantile|4.4%|4.6%|4.3%|7.1%|8.8%|4.3%|
|75%Quantile|9.5%|10.2%|7.9%|14.3%|16.0%|10.3%|
|**No. of Projects**|**28**|**17**|**11**|**28**|**17**|**11**|

# <u>4.5 Assessing the magnitude of IRRs</u>

Is an average IRR of around 7 percent for a typical concession project in Chile a reasonable return or is it low or high? The answer is not obvious since, to the best of our knowledge, there is no equivalent previous study estimating internal rates of return for a countrywide PPP program.<sup>61</sup> One possibility is to compare with the IRR of regulated companies in Chile, even though these sectors are not part of the Chilean concession program. For example, in electricity and water

> 61 Vergara-Novoa et al (2020) estimate the revenues, costs and average costs for highway concessions in Chile directly from financial statements. This study does not consider the change in accounting standards mentioned above.

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