Estimating realized returns of Public-Private Partnerships in Chile

Abstract

Realized internal rates of return (IRR) for 50 highway and airport public-private partnerships (PPP) in Chile are calculated from cash flow data for projects that have concluded, and estimated using regression-based simulations of future cash flows for ongoing projects. These estimates represent the cost to society of PPP provision of infrastructure. The average IRR is 6.8%, with averages of 9.1% and 3.1% fixed and variable term PPPs, respectively. Returns show a large dispersion, which suggests that infrastructure projects are intrinsically risky, independent of the contractual form, and that private participation entails risk shifting from the budget to concessionaires. These results are robust to an alternative estimation methodology based on time series models. When using the ocial estimates for upfront investment instead of reported construction costs, we obtain an “upper bound” for the average return of approximately 10%, a value close to the average estimate from a survey we conducted with 24 experts. Estimated IRRs show a decreasing trend over time, which may be explained the routine use of variable term contracts beginning in 2007, the reform of the PPP legislation in 2010, decreasing debt costs and a reduction in political risks as the PPP program matured.