The Ministry of Public Works generally takes the lead in designing, awarding, and monitoring concessions. But the Minister of Finance must approve the concession contract and the Ministry of Finance is involved in the design of the concession contract, its award, and any renegotiations of the contract. 19 The process gives the Ministry of Finance the opportunity to understand and control the contingent liabilities that the government takes on as a result of concessions.
The key group in the Ministry is the Contingent Liabilities and Concessions unit, which currently has three members. It is part of the Budget Department and was established in 2006. Although it has considerable expertise in concessions, its responsibility is for monitoring a wide range of contingent liabilities, not just those associated with concessions. The government's main source of expertise on concessions is the much larger Concessions Department in the Ministry of Public Works, which the Contingent Liabilities and Concessions unit in the Ministry of Finance relies on for information.
The law on concessions and associated regulation require the Ministry of Public Works to obtain the approval of the Ministry of Finance before issuing bidding documents. Before giving its approval, the Ministry of Finance requires the Ministry of Public Works to list the risks created by the concession, in part to get a sense of the possible causes of contract renegotiation. It also requires the Ministry of Public Works to get the Ministry of Planning's approval of the analysis of the project's economic and social benefits. The Ministry of Finance must approve any circulars that clarify or modify economic aspects of the bidding documents, and the Ministry must be represented on the selection committee that evaluates the bids. The Minister of Finance must sign the supreme decree issued by the Minister of Public Works that formalizes the concession. All supreme decrees must also be approved by the Comptroller and Auditor-General and signed by the President.
The Ministry of Finance's role continues after the concession has been awarded. The Minister of Finance must sign any supreme decree that formalizes a change in the concession. And the Ministry of Finance must approve any agreement between the concessionaire and the Ministry of Public Works to resolve a dispute that is under conciliation. (Responsibility for this work is assigned, not the Contingent Liabilities and Concessions Unit, but to a different unit in the Budget Department.)
Budgetary reforms. Chile's budgeting is cash based. The Congress authorizes cash expenditure in the coming year. Decisions to provide specific guarantees or subsidies beyond the coming year do not need Congress's authorization. (In passing the Concessions Law, the Congress did approve the use of concessions in general and anticipate the use of subsidies and guarantees in particular.) Budgeting for spending under the revenue guarantees is helped by a delay between the time a guarantee is triggered and the time the government must pay the concessionaire. For example, a payment related to a shortfall in toll revenue collected in a given calendar year might be due in July of the following year.
In 2002, Chile adopted a fiscal rule requiring the government to run a surplus (currently 0% of GDP), which may influence the choice between concessions and public finance. 20 According to the accounting that currently underpins the fiscal rule, a publicly financed investment initially reduces the reported surplus, whereas a concession initially leaves it unchanged. Thus, if the Chilean government were struggling to achieve the surplus required by the rule, it might prefer to use a concession to carry out an investment project. In the last few years, by contrast, when the government's fiscal position was extremely strong, the government might have preferred to use public finance, to reduce the reported surplus and thus reduce pressure for other spending.
The government's Infrastructure Fund also plays a role in managing contingent liabilities. Created to facilitate cross-subsidies between the concessions for different sections of Route 5, its role has changed over time. The IMF has commented as follows on the fund (2005, 34):
Given that the fund is now fully consolidated within the budget, it may not seem necessary any longer. However, recent budget reforms have changed the purpose of the fund and made it a useful tool to provide discipline to the PPP program. In particular, the Ministry of Public Works is now required to pre-fund the present value of government guarantees to public-private partnership (PPP) investments in the Infrastructure Fund. Furthermore, since the fund is meant to cover future contingent liabilities, ministries cannot use it for any other purposes.
Guarantee fees. In the early concessions, the government charged no fee for revenue guarantees. Of course, the revenue-sharing agreements that accompanied the revenue guarantees are a form of payment, and, if bidders believed that the guarantee was more valuable than the associated revenuesharing obligation, the offer of the guarantee would have improved the terms on which they agreed to undertake the concession. In 1998, however, the government offered an optional revenue guarantee for the concession for Route 68 (Santiago-Valparaíso-Viña del Mar) and required bidders accepting the guarantee to pay a fee for it. Two bidders sought the guarantee; the winner and one other declined it (Gómez-Lobo and Hinojosa 2000). A key difference between the concession for Route 68 and previous concessions was that Route 68 was awarded on a least-present-value-of-revenue basis, which reduced the concessionaire's exposure to demand risk and thus reduced the demand for a guarantee (Engel, Fischer, and Galetovic 2001). The government now offers guarantees for a fee, even if the concession is not awarded on a least-presentvalue- of-revenue basis.
Monitoring. The Ministry of Public Works is responsible for monitoring concessions once contracts are signed. (When the Ministry has executed a concession on behalf of another ministry, as in the case of jails and airports, a committee comprising representatives of both ministries is involved.) The Ministry of Public Works thus plays a key role in mitigating risks where possible and in providing early warnings of expenditure. The high regard in which the Chilean concessions program is generally held (Constance 2004; IMF 2005) suggests that contract monitoring is probably reasonably good in many respects. But problems have been identified that are relevant to the management of contingent liabilities. For example, the Ministry of Public Works has been criticized for not independently collecting data on traffic flows to check claims under the revenue guarantees (Engel, Fischer, and Galetovic 2009, 46). The Ministry does, however, sample traffic flows and can terminate a concession if it discovers that the concessionaire has provided inaccurate traffic data. Concerns have also been expressed about the sharing of information between the Ministry of Public Works and the Ministry of Finance.
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19 The text in the next two paragraphs is taken with modifications from World Bank (2007).
20 The text in this paragraph is taken with modifications from World Bank (2007).