Analysis

Compared with other countries, Chile's approach to managing contingent liabilities relies heavily on quantitative analysis. This may reflect both the quantitative analytical skills of Chilean officials and the fact that Chile's PPPs involve bigger guarantees than those of, say, Victoria.

Cost-benefit analysis. Chile was one of the pioneers of the use of cost-benefits analysis for public investment projects (Fontaine 1997). Projects that are concessioned are subject to cost-benefit analysis. Projects must generally have an expected annual social rate of return exceeding a threshold (currently 8%), although Engel, Fischer, and Galetovic (2009) reports that the Ministry of Public Works has sometimes circumvented this control.

Comparison with public financing. Concessions are the default choice for financing projects that have an estimated financial rate of return that is sufficient to attract private investors or close enough that only a small subsidy is required. Comparisons of the estimated fiscal cost of a concession and the estimated fiscal cost of a publicly financed project have so far been undertaken only for projects for which the government is the purchaser of the services, such as dams, jails, and public buildings.

Quantification of contingent liabilities. In the late 1990s, the Ministry of Public Works commissioned a study that estimated the fiscal effect of revenue guarantees and revenue sharing (Gómez-Lobo and Hinojosa 2000). Later, the Ministry of Finance, in collaboration with the Ministry of Public Works, commissioned further work on the quantification of guarantees and on the options for managing them from the World Bank (World Bank 2003, 2007). This work led to the development of a spreadsheet model that could be used to estimate the expected cost of revenue and exchange-rate guarantees (and the expected revenue from revenue- and gain-sharing arrangements) for each year of each concession. The model also generated an estimate of the probability distribution of future spending and revenue each year, which allowed estimates of cash flow at risk and similar measures. In addition, the model allowed the risk-adjusted value of the guarantees to be estimated, taking account of the fact that revenue risk is partly systematic, which means that the value of a revenue guarantee is greater than the expected payment discounted at the risk-free rate. (See appendix 1 for details.) The Ministry of Finance took over the model, developed it further, for example by extending its scope to include airports as well as roads. The Ministry now uses the model to estimate the cost of possible guarantees, to set guarantee fees, and to report information on the costs and risks of guarantees (see Table 4 for example).

Table 4 Liabilities in Chilean concessions, September 2008, US$ million

Source: Government of Chile (2008a,b).

Notes: "n.a." means not applicable because the contract does not contain guarantees; "?" means not estimated. Estimated investment is based on winning bidders' technical offers.