Market Provision of Highways: Lessons from Costanera Norte
John M. Cobin
Professor of Economics and Public Policy
Universidad Finis Terrae,
This paper evaluates Costanera Norte, a failed highway concession in Santiago, Chile. Following the worldwide trend toward privatization, this project is one of many infrastructure concessions in Chile. However, the project does not represent complete privatization. Semi-privatization may not be the most efficient and effective means to provide highways in the public interest, which are subject to ten concerns: (1) technical flaws that slow production and augment costs, (2) doubtful cost estimates produced by regulators, (3) legal difficulties and political uncertainties, (4) completion time and end-of-term maintenance problems, (5) environmentalist clashes in the political process, (6) the strategic use of concession policy by vote-seeking politicians, (7) rent seeking problems, (8) problems with financial guarantees in the bidding process, (9) social losses from knowledge problems in planning and forecasting, and (10) efficiency problems. After reviewing some basic information about highway construction and theoretical issues, the paper furnishes three paradigms by which highway projects may be provided. These include direct government provision, semi-privatization, and plenary privatization (also known as allodial policy). Like semi-privatization, plenary privatization would be able to take full advantage of touted market-based policies like congestion pricing to enhance efficiency. Yet, if minimizing public choice and knowledge problems is important for policy, the latter alternative is preferable.
CHILEAN INFRASTRUCTURE PROJECTS AND COSTANERA NORTE
In a recent paper, José Gómez-Ibañez (1998, pp.133-134) emphasizes the imperative to consider incentives and information in transport pricing policy. Policy failures result from planning shortcomings in dealing with these matters, even when implementing components that are theoretically beneficial. He argues that marginal cost pricing is "optimal" (pp. 99, 104), effective, and plausible while regulatory pricing schemes -- Ramsey pricing in particular -- are difficult and scarcely beneficial in social terms. For instance, he points out that deregulating the airline industry permitted markets to work to lower prices and improve quality substantially, while complex and costly price regulation of the United States Post Office has not produced many benefits (p. 133). Gómez-Ibañez argues that marginal cost pricing has not been utilized in highway transport provision on account of government failure, perhaps due to regulatory capture or vote seeking problems (p. 100), or on account of pressure from special interest groups. Vying to maintain their current level of benefits, such groups have incentives to lobby against marginal cost pricing schemes -- deriding them for the supposed difficulties they pose (pp. 125, 133). Also, Herbert Mohring (1998, p.198) contends that the attitude of citizens, who "dislike taxes and distrust governments", coupled with political exigencies or difficulties under democratic processes, make it unlikely that socially efficient transport planning ideals like congestion pricing will ever come to fruition. This paper recounts the story of a regulatory failure in implementing a highway concession which supports and builds on these motifs from Gómez-Ibañez and Mohring. In the overall analysis, one can see how political institutions and problems with incentives and information contributed to the failure.
The Chilean economy has been expanding rapidly, and its capital city of Santiago has emerged as a first world city. Indeed, the catallactic environment in Santiago is remarkable, especially considering the amount of new construction and the expansion of services. However, Santiago's development has been partly hampered by its inadequate and antiquated transportation infrastructure, prompting the Chilean government to take action (Graff, 1996). Thus, the Ministries of Public Works, Housing and Urbanism, and Public Finance have adopted ambitious plans for its rapid improvement and expansion. For example, a third metro line was recently added (which will soon be extended through the downtown area). Two more metro lines, plus some line extensions, are also planned, as well as twelve new highways. Additionally, there are plans to install a long monorail train over the San Carlos canal in eastern Santiago.(1)
Contrary to calls to implement more government-funded projects elsewhere (e.g., Garvey, 1996), Chileans have elected to utilize widely-praised (e.g., Chetwynd 1993) semi-privatization concession programs to accomplish their plans with over $3 billion of them to be auctioned off over the next several years (Serra 1996, p.213). Many think that encouraging competition through concessions is an adept way to improve transportation infrastructure. Competitive bidding processes, although not unproblematic, are at least a step in the right direction (Paredes-Molina and Baytelman 1996, pp.199, 207-209). But are semi-privatization schemes the most efficient and effective means to provide public works like highways? Many construction interests and government agencies think so.
The United States Trade and Development Agency has favorably eyed concessions in Chile and other South American nations. A few years ago, it announced $5 million in infrastructure grants to help American firms "cash in on the golden opportunity" (Aslam, 1996). Such grant programs are motivated in part by the decline in infrastructure spending (especially federal) in the United States relative to other domestic spending programs, seemingly leaving considerable excess capacity that could be utilized elsewhere around the world, including Chile.(2)
In a report outlining its plan to reformulate Chile's urban development policy, the Ministry of Housing and Urbanism says that new legislation and regulation is needed in order to improve the quality of life for Chileans.(3) The main goals include improving social organization, city functions, and public places, along with ameliorating environmental and ecological conditions. In order to produce these goods, the Ministry says that it will be necessary to subordinate private interests in favor of public ones.(4)
In pursuing these objectives, the Ministry proposes focusing on alleviating negative externalities caused by urban projects, improving municipal financial management, and obtaining deeper "city knowledge" through more research.(5) The Ministry also implies that social peace, which it says is "presently out of equilibrium," will be jeopardized without the new regulation. Notwithstanding successes by current bureaucrats in providing public investment in Chile, the Ministry suggests that a new bureau will be needed that would focus solely on urban planning.(6)
The proposed east-west highway system in Santiago, known as Costanera Norte, was the first of a dozen planned highway infrastructure improvements in the metropolitan area.(7) It is an ambitious concession plan requiring considerable integration with existing infrastructure. For instance, Avenida Kennedy, which comprises a significant portion (one of two parallel parts) of the project's eastern end, has already been completed via direct government provision at the federal and municipal levels. It is about seven and one-half kilometers long, with three traffic lanes on each side, and is one of the few sections of urban highway in Chile that would resemble freeways in North America. The Costanera Norte concessionaire was supposed to acquire Kennedy by purchasing it from the government. With that base, the firm would then build over thirty additional kilometers of new highway, providing transit from the wealthier eastern districts of Santiago to downtown (mostly by modifying existing roadways and by means of installing some extravagant tunnels or trenches), and then cross some poorer districts as it continues out to the airport in the northwest sector of Santiago. The new highway would have two lanes running each direction for the most part (85%), although, like Avenida Kennedy's width, there would be three lanes on each side on the portion (15%) nearest downtown.
Costanera Norte was implemented in January 1996, but was stalled by preliminary concerns until late 1997, and continued to be troubled throughout 1998. Despite being "the emblematic initiative of the Ministry of Public Works", Costanera Norte was cancelled in mid February 1999. Government officials were left to ponder what went wrong, and how and when to revive the project.(8) Then, it was revived in May 1999 -- with a considerably different nature. This paper recounts the problems of the original plan, highlighting the failure of what I call "semi-privatization" schemes, i.e., schemes where the private and public sector jointly produce infrastructure. The collapse of these schemes, such as Costanera Norte, can result in social inefficiencies due to infrastructure provision being thrown back into the hands of the government. Accordingly, some light can be shed on the effectiveness and efficiency of semi-privatization schemes in serving the public interest by considering the Costanera Norte case as well as pertinent theoretical criticisms raised by economists.
II. HIGHWAY CONSTRUCTION COSTS UNDER GOVERNMENT PROVISION
The cost of building highways varies considerably according to real property acquisition costs, terrain, degree of urbanization, roadway width, pavement and base thickness, and any special safety or environmental features required. On the extreme end of the spectrum, Boston is home to the most expensive road in United States history, which had an extraordinary cost of over $1 billion per mile (Simon [NPR], 1996). Paradoxically, another New England road was criticized as "wasteful" because it cost $19 million per mile (Frandsen, 1996), a pittance by comparison.
Elevated multi-lane highways through cities can be costly because of the displacement of current infrastructure. For example, recent costs in the New York City area have been $333 million per mile (Wieman, 1996). However, these high costs are not representative of other major cities. Even with considerable displacement, the costs were only half of that amount in the Los Angeles area 710 freeway extension (Moe, 1994), and only $127 million per mile for Los Angeles' Century Freeway, which is still criticized as having been too costly (Smith, 1993), even though it was relatively cheap in comparison to other projects. Fixing inter-city freeways in central Orange County, California cost $17.7 million per mile (Mott, 1994). Elsewhere in Los Angeles, costs for elevated highways were $20 million per mile, car pool lanes were $2.5 million per mile, and car pool lanes with tolling systems ranged from $30 million to $50 million per mile (Poole, 1994).
Rural and even some suburban highway construction costs far less than complex urban highways in major cities, particularly since there is little infrastructure displacement and there are typically fewer traffic lanes. Most interstate highways in the United States cost just over $1 million per mile to build (Grossman, 1996). In 1996 dollars, the Federal Highway Administration has calculated the "weighted rural and urban combined" costs per mile of interstate highway to be $20.6 million.(9) Other highway construction normally ranges from $1 million to $5 million per mile, but in mountainous regions, like West Virginia, the costs can be as high as $15 million per mile (Brogan, 1997). The costs per highway mile in the expanding Los Angeles metropolitan area for four Ventura County projects were $1.7 million, $2.1 million, $2.4 million, and $2.9 million respectively (Green, 1996). Since most highways are built by direct government provision, it is difficult to determine what their market costs would be. Yet these figures might at least serve as reasonable estimates of expected construction costs under semi-privatization.
The construction of Costanera Norte would require some condemnations, but they are expected to be relatively unproblematic.(10) The cost of the thirty-year concession, including the Avenida Kennedy acquisition, is estimated to be about $13 million per mile, which is not prima facie unreasonable given the foregoing figures from the United States and the considerable urban displacement it will entail. However, one must also take into account other factors before making any definitive judgment. Labor costs and labor productivity are not the same in Chile and the United States, and Costanera Norte has, for the most part, fewer lanes than a typical big city highway in America. Thus, intuition might suggest that the cost of the project is high, perhaps due to inefficiency. Scholars have recognized that highways can enhance economic growth and even generate positive externalities (Urban, 1996). If the project could in fact be produced efficiently, then there might be reasons to believe Costanera Norte would provide net benefits that serve the public interest by both alleviating negative externalities (11) and spurring economic development.(12) A transparent concession bidding scheme should increase competition and improve production efficiencies, ceteris paribus. However, as in the case of Costanera Norte, perceived net social benefits from concession schemes will be tapered when political process incentives and institutions are endogenized in the analysis.
III. THE RISING POPULARITY OF SEMI-PRIVATIZATION SCHEMES AND POLICIES OF CONGESTION PRICING
Support for semi-privatized highway policy via franchising and concessions has been rising. Direct government provision has produced neglected and bad roads, partly due to public choice problems,(13) further encouraging planners to favor semi-privatization schemes (Chetwynd, 1993).(14) Concession toll highways are considered to be more efficient, faster to build, a way to alleviate negative externalities (and perhaps some public choice problems), and empirically successful in the United States (Lutz and Bartlett, 1995). They are often profitable too. Government agencies have themselves tried to capitalize by selling tollway rights. For instance, a portion (4.4 miles) of a New Jersey turnpike was sold "to a state authority to raise money" in order to ostensibly help balance that state's budget (Boroughs and Collins, 1992).
Gabriel Roth argues that under public provision users "face increasing congestion", and the system is suffering from deterioration of pavements and public choice impediments (Roth, 1991). Indeed, the climate of public opinion may be changing, with many people viewing toll roads as choice-enhancing solutions (Haldane, 1997), and many businessmen interested in participating. In Canada, the construction industry has been lobbying for admittance into the highway market, although in Alberta semi-privatization is evidently viewed as "radical" (Jenkinson, 1993).
The lack of confidence in direct government provision by Chileans follows an international trend favoring less reliance on public transportation infrastructure, which has been criticized by scholars across the political spectrum. For instance, Henry Holmes argues that it has promoted "economic injustice and environmental degradation" and have "fractured" communities (Holmes, 1996). While some praise public transportation systems over extending automobile use, such as in the case of the light rail system in Los Angeles (Gofman, 1994), many others chide them as wasteful failures of government planning (de Moraes, 1995).(15)
The Key Concern: Traffic Congestion
One of the primary negative externality targets of Chilean highway concession policy is congestion reduction. The social costs of congestion are great and growing worldwide, and public mass transit systems are not averting them. Thus, semi-privatization and reliance on markets has become attractive (Samuel, 1997). For instance, California's congestion problems have reached dramatic proportions (Manasian 1990). Perhaps hundreds of thousands of hours are wasted daily in traffic jams in Los Angeles alone (e.g., Moe, 1994), where emission levels are two and one half times their level under free-flowing traffic conditions and losses to time and productivity amount to $14 billion annually (Schiller, 1998).(16) Robert Poole cites a Texas Transportation Institute study suggesting that "Americans wasted $48 billion in 1992 stuck in urban traffic congestion" (Poole, 1996). Dawn Sauter notes that "an estimated 70 percent of the nation's rush-hour commuters must navigate stop-and-go traffic conditions" and, citing Bruce Ingersoll and Alice Reid, the total cost of congestion comes to $820 a year per capita in Washington D.C. (Sauter 1997, pp.1-2). In Chile, congestion is hardly trivial, and improvements to infrastructure are needed. Massive and prolonged congestion still occurs in Santiago, even on freeways like Avenida Kennedy, where vehicles may be stalled well over an hour due to incapacity to manage heavy rainfall and roadway emergencies.(17)
Cars stuck in traffic jams cause up to three times the pollution they would otherwise cause, but planners are impeded from resolving them on account of knowledge and public choice problems, particularly special interest pressures.(18) For example, a knowledge problem arises in predicting traffic flows and knowing the profitable (optimal) amount of road to build. Indeed, in Mexico, inadequate knowledge led planners to set inappropriate toll rates, resulting in fiscal disaster (Emmons and Brand 1993, pp.7, 11). A growing number of transport analysts are writing about public choice problems associated with government provision and its monopoly power over roads (see Peter Samuel, 1997). For instance, if "telematics" were adopted (i.e., policies of "smart cars" and "smart highways"), rent seeking auto makers would be able to boost profits from each sale since cars would have more electronic gadgets. Clearly, special interest groups or firms like General Motors, Lockheed Martin, and Bechtel have been handsome beneficiaries of large government grants to establish platoon driving, which would enable a driver to read a magazine while the car's electronics take him to his destination automatically (Robb-Nicholson, 1996). Nevertheless, despite these planning pitfalls, Santiago planners hope to direct infrastructure concessions to improve the quality of life, saving commuting time by reducing congestion with electronic toll collection and congestion pricing.(19)
Toll Roads and Toll Collection
Toll roads are certainly not a novel concept. In the United States, government-run road building has relatively recent roots, beginning around World War I (Weingroff, 1996). Toll roads were utilized successfully in Britain two centuries ago (Malone, 1990), and spontaneously emerged in California in 1850, with about 150 being operated through 1902. Accordingly, they may be a means of "enlisting private-sector entrepreneurship into the field" to control congestion problems (Klein and Yin, 1994). However, semi-private toll roads are not a panacea. Some are not successful, as evidenced by the Dulles tollway near Washington, D.C. which flounders under low quantity demanded.(20) Sauter considers the Dulles failure to have been caused by planning and forecasting errors (which were not fully disassociated from the political process). She also thinks, that the Dulles tollway serves as an example of how the price system does work to allocate resources efficiently (Sauter 1997, pp. 89-119, especially 118).
A pervasive technological problem with toll roads has been the cumbersome nature of toll collection via toll booths or coin drop machines. However, recent scanning technology has relieved this burden. In Orange County, California, antennas are used to scan microchips in cars traveling as fast as 100 mph, and highway users are automatically charged the appropriate toll (D'Souza, 1995). Similar "smart card" technology has been considered in Great Britain (Malone, 1990), and some have discussed smart cars and smart highways as possible technological breakthroughs that would improve toll collection (Rhode, 1992). However, reducing lag times at toll booths with scanner technology will not be a sufficient means to alleviating congestion problems in and of itself (Riley and Fresco, 1996).
What seems to be needed is congestion pricing, i.e., charging higher tolls for roadway use during peak traffic periods. Congestion and other roadway problems emerge because road use is not priced (Giese and Aron, 1993). Scholars like Poole and Roth contend that roads would be better if privatized and congestion pricing were utilized (Poole, 1996), which was proven successful when tried in Southern California (Schiller, 1998). Despite some political opposition, congestion pricing could be a sensible policy. Kim Clark offers that, "peak traffic pricing could serve as one of those terrific examples in which the invisible hand stirs up benefits for everyone-- faster commutes, cleaner air, financial rewards for investors, and savings for taxpayers" (Clark, 1997).
Mohring (1998, pp.189-191) reminds us that, transport policies of subsidies, reserved bus lanes, at least a limited use of meters, and especially congestion pricing (which would have the same effect as staggering work hours, p. 215) could increase social efficiency. Indeed, HOV lanes and mass transit, which are essentially "bribes" and "grants" to consumers (p. 192), could be efficiently displaced by congestion pricing. Thus, he argues that "introducing congestion pricing to an urban road network would substantially increase the efficiency with which it operates" but he laments that "many problems must be solved to ensure that congestion pricing could make (almost) everyone better off" (Mohring 1998, p. 212).
Randall Holcombe argues that infrastructure policy which ignores the incentives and institutions it creates will have adverse effects. For example, congestion may not be alleviated by well-intentioned highway planning. This would certainly be true when planning reduces opportunities for application of the Coase Theorem (21) (although Holcombe does not mention it ), and thus planning might produce inefficiencies and negative externalities. Plus, planners may be misdirected (being constrained by the knowledge problem) in deriding "urban sprawl" since forcibly congesting downtown areas may be worse than sprawling. Thus, he suggests that tolls would be an effective market mechanism for reducing congestion (Holcombe, 1990). In Holcombe's view, private toll roads would be more efficient to run, would likely be built faster, and would ease congestion problems. Using tolls on government roads would also serve to alleviate congestion when applied appropriately. Funds to build roads must come from somewhere, and tolls seem to be a reasonable alternative to other taxes. Moreover, tolling roads also provides a post-construction opportunity to see if the project really is self-sustaining.
Even some who otherwise advocate top-down transportation planning have recognized the sensibility in coupling planning with market-based congestion pricing (Spiegler, 1995). Others suggest arranging an admittedly difficult "intelligent alliance of state and market" where governments lead while the price system is relied on to reduce congestion and social costs (Flagg, 1992).
However, a few critics are leery that pricing might well rationalize increased automobile use and bring greater environmental harm. They say this despite acknowledging that (a) electronic tags for scanning are 99.7% accurate, (b) congestion pricing would be beneficial, and (c) overall automobile use might be reduced (Raubner, 1994). There might be policy concerns about practicality too. Norwegian experts have estimated that peak hour prices would have to be four to five times as great as off-peak rates in Oslo for congestion pricing to have a significant affect (Robb-Nicholson, 1996). Conformably, Héctor Gutiérrez argues that there are limits to the effectiveness that tolls can have in eliminating congestion (Gutiérrez 1996, 146-147). Similarly, since accidents and other traffic incidents account for about half of all highway congestion (Schrank, Turner and Lomax, 1993), the most congestion relief that can be reasonably sought by means of congestion pricing is a 50% reduction.
Nevertheless, market solutions such as tolls and concessions might be optimally utilized through prudent planning. Some enhancements suggested by Gutiérrez include bidding to obtain the lowest toll charges, eliminating government guarantees, reinforcing property rights, and contingent clauses in contracts which permit governments to purchase concessions and allow expansion of capacity (Gutiérrez1996, pp.146-147). Something else to be avoided, according to Pablo Serra, is fixing toll rates, since that would cause "excessive rigidity" and thus lower social welfare (Serra 1996, p.225). Furthermore, potential public choice problems must be kept in check. Some toll road operations, such as in Orange County, California, have been criticized because the compensation packages for bureaucrats overseeing the tollway projects seem very high (Platte, 1995), perhaps indicating political favoritism and rent seeking (22) along with other inefficiencies.
IV. CRITICISMS OF SEMI-PRIVATIZATION SCHEMES AND COSTANERA NORTE
Direct government intervention may not be the best means of providing infrastructure. Semi-privatization schemes could be a more efficient alternative. In highway construction, technological advances have now made privatization quite feasible, so that market mechanisms like congestion pricing can yield substantial social benefits. While Costanera Norte certainly follows the worldwide trend toward privatization, it does not represent plenary privatization. Semi-privatization schemes such as Costanera Norte only differ from direct government provision in that it is to be financed and built by the private sector, and in that, like all infrastructure concessions, it expands the feasible set of fundable projects (Cobin, 1999a).
Correspondingly, given that privatization is a desirable policy, questions still remain regarding the optimal extent of privatization, along with what political and legal framework provides the optimal basis for it. Specifically, it is not clear that privatizing only part of the infrastructure provision process best solves the problems associated with direct government provision. Moreover, it is not clear that semi-privatization is the most efficient and effective means to provide highways in "the public interest".
Accordingly, Costanera Norte is not without its detractors. Businessmen and concerned citizens post signs of protest along the proposed route. Interviews (23) revealed that nearly all potential concessionaires and the mayors of two wealthy municipalities opposed the project. In examining their concerns, as well as the theoretical work of others, it is possible to identify ten general problems of semi-privatization concession projects: (1) technical flaws that slow production and augment costs, (2) doubtful cost estimates produced by regulators, (3) legal difficulties and political uncertainties, (4) completion time and end-of-term maintenance problems, (5) environmentalist clashes in the political process, (6) social losses due to the strategic use of concession policy by vote-seeking politicians, (7) rent seeking problems, (8) problems with financial guarantees in the bidding process, (9) social losses from knowledge problems in planning and forecasting, and (10) efficiency problems.
Technical Flaws That Slow Production And Augment Costs
Building a highway is not tremendously complicated, but it does involve many planning criteria, including design, soil management, paving methods (with either longer lasting concrete or quieter asphalt -- which will be used in at least part of Costanera Norte), tolling, lighting, drainage, various other technologies, and maintenance (Humphrey, 1996). Providencia mayor Cristián Labbé thinks that Costanera Norte has technical flaws, not the least of which is the problem of parking -- an issue which has also been raised by others (Serra 1996, p.231). Accordingly, many potential concessionaires are too apprehensive about Costanera Norte's specifications to consider participating. Vincente Dominguez Vial, leader of the Chilean-Spanish Concessiones Chilena Limitada, thinks that while the problem of integrating Avenida Kennedy is small, problems with the specification of the inner-city tunnels and trenches required, and especially their ventilation, pose considerable difficulties.
Carl Weber, General Manager of Obras y Desarrollo, also argues that Costanera Norte has been poorly designed. For instance, little consideration has been given to the potential damage to buildings when tunnels and trenches are installed downtown. In addition, he claims that the technology needed to scan and charge tolls at high speeds (100 km/hr.), as the project specifications demand, simply does not exist, debilitating the project and elevating risks for concessionaires. However, many would disagree with Weber's technology assessment (cf. D'Souza 1995; Malone 1990; and Rhode, 1992). Claudio Garín Carrasco, Manager of Urban Concessions for the Ministry of Public Works, is sure that the technology exists, noting Hughes products in use in Los Angeles and Toronto (which can handle speeds up to 150 km/hr.).
Doubtful Cost Estimates Produced By Regulators
People who have analyzed Costanera Norte believe that Chilean planners erred in their cost projections. Labbé argues that the project is not the most cost-effective and environmentally sound alternative, preferring projects such as ring roads around Santiago. Accordingly, Dominguez would prefer instead to bid for the Americo Vespucio ring road concession. Weber, like Dominguez, believes that ring road project should have been the first one started, along with the planned improvements to the North-South route. Las Condes mayor Joaquín Lavín Infante says the bidding and construction process is slow, costly, and plagued with a number of legal difficulties. Maximiliano Ruiz and Fernando Vergara of Infrastructure 2000 believe the plan's design is not very economical and the estimated costs used in the studies are inexact (i.e., they are likely underestimated). Dominguez is very pessimistic about the project, noting his belief that tolls would have to be increased by as much as 60% to cover the costs of construction and a decent profit margin of perhaps 15% (which would in turn reduce quantity demanded).
Legal Difficulties And Political Uncertainties
One of the biggest concerns is the project's uncertainties. Labbé notes that Costanera Norte is and will be embroiled in legal difficulties, mainly resulting from usurping the real property in a recalcitrant sector of Providencia known as Pedro de Valdivia Norte. Residents fear that the project will lower their property values and increase pollution. Accordingly, Dominguez cites many logistical difficulties, not the least of which arise from the complaints of these residents and the condemnations in the Recoleta area. Chilean legislation secures private real property from condemnation without compensation and mandates strict criteria for the taking of property when it does occur.(24) Ruiz and Vergara contend that the rules and regulations for the "game" are not clear, leaving far too many questions about the project unanswered. Not the least of their concerns are the political risks associated with the project, also noting problems with condemnations, delays associated with bidding prequalification and selection, and how toll violators will be fined.
Weber feared that there is a risk of state-led competition, since governments could operate an alternative to Costanera Norte that would change demand and thus lower projected revenues (which is in fact what would happen later with the advent of Costanera Sur). Serra notes, "In highway concessions, traffic, and therefore the franchise-holder's income, can be strongly influenced by government decisions regarding the rest of the road network" (Serra 1996, p.214). Such state-led competition was seen in Chile previously when a state by-pass road was constructed over private tunnel Melón, a couple hours north of Santiago.(25)
Similarly, administration and demand forecasting in Mexican highway projects have been troublesome, including the Cuernavaca-Acapulco and Guadalajara-Tepic routes (Emmons and Brand 1993, p.11). Moreover, Michael Meacher argues that overestimates of traffic growth adversely affect revenue forecasts and could potentially leave the government responsible for any shortfall, meaning that many of the associated risks with concession schemes are ultimately still born by the state (Meacher, 1995). Such was the case in the recent Mexico City-Acapulco highway debacle (Sheridan, 1996).
Completion Time And End-Of-Term Maintenance Problems
Concessionaires always have an incentive to complete their projects quickly in order to receive revenues faster, but this benefit might be offset by costs such as the risk of losing the bidding war to begin with (presuming that completing the project faster will be more costly). The low bid might often be the one which utilizes a longer time to completion, and thus might not best serve highway consumers who prefer present over future consumption. Alternatively, under the Mexican concession system, bids are selected according the following priorities: "(1) shortest construction period; (2) total cost; (3) reliability of the proposed financing; and (4) experience and qualifications of the bidder" (Emmons and Brand 1993, p.8). It appears that the Mexican system eliminates the completion problem while the Chilean system does not.
Additionally, in any highway concession, problems with road maintenance are to be expected during the final years of the concession, when concessionaires have little incentive to make costly repairs. This fact suggests that semi-privatization schemes will tend to produce socially inefficient outcomes during part of the concession period because of institutional incentives.
Environmentalist Clashes In The Political Process
Toll highway concessions have been widely criticized as being impractical, if not deleterious by environmentalist groups. For example, a toll road between Canada and the USA has been denoted as "an environmental, health and safety nightmare" (Ghent, 1996). Some claim that antidotes like sound walls do not work, implying that they are a ruse to get people to believe that they help environmental quality (Smith, 1993). In many cases, radical environmental groups have been successful at stopping toll road expansion in Europe (Boyle, 1995), just as they have hampered construction efforts in Mexico (Emmons and Brand 1993, p.11). Environmental groups in Chile caused a number of costly roadblocks for Costanera Norte. Ruiz and Vergara of Infrastructure 2000 were very concerned about the unknown costs these groups' activities would impose. In 1997, environmental groups caused delays in Costanera Norte by demanding that more studies be conducted, in spite of the then current favorable impact studies.(26) Continuing throughout 1998, the project proved to be a hot issue in Santiago because of environmentalist concerns and other political problems.
Garín said that the Ministry of Public Works took a more pragmatic stance on environmental issues. If there is going to be more infrastructure then there are going to be added social costs. The goal is not to reduce these costs to zero but to minimize them (without spending a fortune) to provide more transportation infrastructure. Chile might have an advantage in employing environmental technologies that help minimize costs, since, as some argue, the government retains many standards-setting functions and operates them well (Bretl, Deluca, and Fredell, 1996). Indeed, scholars have offered practical solutions to smog and congestion problems through combinations of market and governmental regulatory policies (McDonald and Mohammadioun, 1994). But these pragmatic oblations and abstract postulations did little to appease environmentalists in the case of Costanera Norte.
Strategic Uses By Vote-Seeking Politicians
Gómez-Ibañez (1998, pp.106-107) argues that vote seeking leads to the production of over capacity in highways at subsidized prices and thus prevents socially efficient solutions. Likewise, Mohring (1998, p.198) points out that congestion pricing (which is socially beneficial) is "a very hard sell" politically and thus has rarely been used in practice. Thus, vote seeking leads to sub optimal outcomes.
Concession projects are not free of the burdens of the political process and policy debate. Mark Crain and Lisa Oakley argue that there is a "strategic use of infrastructure" which is used to affect future public choices (Crain and Oakley 1995, pp.3, 15). Indeed, the theory of public choice suggests that, under a democracy, it will be nearly impossible to eliminate such tendencies. Correspondingly, Lavín claims there are political interests backing Costanera Norte. In particular, Ricardo Lagos, the head of the Ministry of Public Works when Costanera Norte was announced and the leading presidential candidate in 1999, might have a private and personal interest of wanting to garner wider public support by completing highly visible infrastructure projects. Lavín is running against Lagos, and his bid might be harmed by opposition to the project, although opposition does help him retain local support. Therefore, given the political issues surrounding the project, Weber rightly suggests that aspects of public choice theory should be applied in analyzing it.
Public choice theory suggests that vote seeking politicians will always seek to optimize the number of votes they receive by promoting apparently beneficial policies (such as infrastructure) vigorously while avoiding detailed discussions of costs or taxes which might offend voters. Conformably, the objectives of the Chilean ministries (noted earlier) for changes in urban policy are ambiguous and nebulous, lauding vague benefits without detailing costs. It is also unclear that Chilean planners' desire to subordinate private interests in favor of public ones, as they have suggested, is either realistic or expedient. This sort of rhetoric might sound good to large blocks of voters, but in reality it probably has little practical significance. Public choice theory suggests that people pursue self-interest goals. Private interests dominate, whether in the market process or the political process, rhetoric to the contrary notwithstanding. In other words, even political actors are going to pursue their personal and private interests primarily, and only pursue public interest goals secondarily. Thus, in analyzing the Costanera Norte case, semi-privatization schemes can not solve public choice problems entirely; they can only hope to reduce them somewhat.
Rent Seeking Problems
Because government is still involved in semi-privatization schemes, rent seeking is not eliminated entirely. Some rent seekers simply shift to a new arena, focusing on the political implementation and regulation of toll highway concessions. Without toll highways, the booty available for rent seekers is constrained by the government budget (especially in Chile where deficit spending is prohibited). Concessions can augment the potential rent seeking pie because government still heads the process, even though financing comes from the private sector rather than taxes. Accordingly, significant rents appear to be available. Taking into account what may be observed: (1) there have been attractive, high-priced projects proposed or completed in the United States, Mexico, Chile, and elsewhere, (2) there has been considerable political interference by special interest groups, and (3) there have been considerable "paperwork contests" (Higgins and Tollison 1988, pp.150-151) and other scholarly work on infrastructure topics, indicating both academic and practical value. Scholars have provided conflicting views over the usefulness of guarantees, environmental issues, as well as other conflictive aspects of highway concessions under semi-privatization policy, but at any rate the subject seems to be good business for all side within and without the academic market. Since all action is costly, the levels of activity surrounding infrastructure development indicate the existence of considerable rents. Accordingly, rent seeking will tend to retard efforts to improve social efficiency by means of semi-privatized concession schemes.
On the surface, there are no obvious cases of crass rent seeking (outside the circle of bidders perhaps) with respect to Costanera Norte. But the denouement of the plan, and its political development, tend to make onlookers suspicious that considerable rent seeking is occurring. Correspondingly, Estrategia, one of Chile's two leading financial papers, reported that of the many firms competing for past concessions, three have won 82% of the contracts, exemplifying a trend toward concentration among franchises.(27) Such concentration or monopolization would seem antithetical to promoting the public interest.(28) Of the fifteen firms that were pre-qualified to bid on Costanera Norte, only a few were considering doing so (based on inquiries in the southern spring 1997). At that time, only two firms were committed to participate, and at least four firms would not participate. At the close of 1998, only a French firm, Transroute, entered a bid. This lack of participation indicates that Costanera Norte is not widely recognized as a desirable project in the market.
Complexities and rigidities can be useful to rent seekers looking to carve a niche for themselves, but they also tend to create inefficiencies. For instance, legislation mandating a certain technology must be utilized, which is currently provided by only one or even a few firms, would tend to concentrate benefits narrowly while dispersing social costs over the mass of ill-informed voters.
Problems With The Bidding Process And Project Development
Likewise, the political process in Chile has complicated the concession bidding process and hampered efficiency. Chilean policy grants relative benefits to larger firms who have large fixed investments in organizational and institutional costs that facilitate complex bidding. It is very costly to prepare a good bid, which could cost as much as $300,000 or more. Unless a firm is satisfied that the terms of the project will generate a reasonable net rate of return (in the range of 9% to 14%), including reasonable estimates for various risks, it will not be willing to spend scarce resources to prepare a bid. And so it was with Costanera Norte.
The bidding process for Chilean concessions has not passed without scholarly criticism. Eduardo Engel, Ronald Fischer, and Alexander Galetovic argue that information asymmetries and inherent risks associated with highway construction will lead the current bidding system to falter. They suggest that a scheme which permits flexibility in the length of the concession and in toll rates (both of which are presently fixed by the regulator) would reduce bankruptcy problems, costly renegotiations or contract modifications, risks of forecasting error, and maintenance problems (Engel, Fischer, and Galetovic 1996, pp.6, 20-22). They offer a more simple system to reduce risks and facilitate smooth bidding based on a formula to find the net present value of cash flows. Moreover, they point out defects in the Costanera Norte plan: including toll fixing, inadequate regulation, and the difficulties for the Ministry to estimate construction costs in order to provide financial guarantees (Engel, Fischer, and Galetovic 1997a, pp.182-186, 207-209).
Jean Tirole applauds their work, but notes that the proposal does not provide a reasonable discount rate, method to estimate tolls, and does not improve the problem of forecasting highway use or demand. He also says there will be regulatory and practical difficulties, including poor incentives to maintain highway quality and support commercial services along the route, suggesting that regulators should use financial awards to improve incentives and set minimum quality standards (Tirole 1997, pp. 201, 210-214). Also citing problems in forecasting demand, Michael Klein of the World Bank is more critical of the proposal, which would weaken regulatory control, arguing that concessions should be closely regulated like natural monopolies to provide a fair rate of return and equitable distribution of risks (Klein 1997, pp.220-223). In reply, Engel, Fischer, and Galetovic concede most of Tirole's points, suggesting that giving regulators a range of possible tolls would be helpful, especially if coupled with a congestion pricing scheme. They are more critical of Klein, denying that highway concessions will be mortally susceptible to interest group pressures or that low demand will always make projects unattractive to the private sector. The key is flexibility (Engel, Fischer, and Galetovic 1997b, pp.218-221). The rigidities that exist may imply systemic, accidental inefficiencies and/or intentional regulatory capture designed to benefit rent seekers and favor brokers.
Ives Montélimard, leader of Consorcio Internacional Autopistas Chilenas (Transroute), is in favor of Costanera Norte, and virtually stood alone supporting it when it finally failed. However, he foresaw problems that would arise because the Ministry of Finance was not going to provide the victorious firm with sufficient financial guarantees. Many scholars view state financial and contractual guarantees are crucial to the success of any infrastructure concession project (Lange and Howson, 1996), although some do not agree (see Gutiérrez1996, pp.146-147). These guarantees lower the risk of future revenues to the franchise operator and make projects more feasible (Serra 1996, p.229). Accordingly, firms bidding on the Costanera Norte concession have been very concerned about the guarantees, as well as assurances of consistent traffic flows and how users will be charged. In August 1998, regulators thought that they had found a satisfactory means to assuage the firms.(29) However, at the end of the year, seven of the eight remaining firms dropped out of the bidding competition, leaving only Transroute to submit a lame bid. (Transroute did not meet all the bid specifications, committing less than half the funds required to make its bid valid.) This poor result was a "hard blow" to the Ministry of Public Works, embroiled in the prolonged and costly debacle, which in early January 1999 consoled itself in knowing that at least the project "will not die".(30) However, the bidding process for the emblematic initiative was cancelled on February 15th, leaving uncertainties about when or if it would be resuscitated.(31)
The Ministry of Public Works announced in January 1999 that it was considering revamping the Costanera Norte package by combining it with the Americo Vespucio ring road and the North-South system projects into one "mega-project", in hope of attracting more international investors. Montélimard felt that whether his firm got the project simply became a political decision, adding that his firm would prefer to do all three projects. He considered the selection process to have been entirely unjust insofar as his firm was affected. If the Ministry had re-bundled the project, it would have reopened all the concerns about Costanera Norte. It would have also meant that concessionaires had wasted three years of preparation and considerable expense because of this government failure. Rather than recognize their failure and scrap the project, the government would in effect force it down the market's throat by making the concessionaires interested in the other projects also produce Costanera Norte.(32) In the end, another path to "success" was chosen.
The plan was resurrected on May 3, 1999 with a new focus. Rather than force the market to accept the Costanera Norte proposal by packaging it with the other two urban concessions, the Ministry of Public works set new dates for the concessions, and radically altered the Costanera Norte plan (which will be first in line for the new bidding), effectively transforming it into direct provision. The Chilean government will now assume far more risk and the required investment will be lowered, with a maximum cost set at US$300 million in order to assure bidders what their costs will be. This will provide greater firm profitability, especially because the state will also guarantee a minimum amount of traffic flow. In addition, special legislation has been submitted to provide for strict policing and fining of toll violators on Costanera Norte. In effect, these guarantees amount to subsidies and removal of most market risks such that there is little resemblance to true market provision. In this case, semi-privatization has been transformed into essentially direct provision. In the same way that governments regularly borrow from their citizens to finance projects, and often use private contractors to do the work, Chilean planners will simply use the bidding system to select lenders and contractors to complete the ailing project. Besides political motivations in an election year, the government hopes to boost lagging employment in the construction sector by forcing the plan into existence.(33)
Correspondingly, it is of considerable interest to note the announcement on April 21, 1999 that some municipal governments will be starting a new project called Costanera Sur, which will directly compete with a large segment of Costanera Norte. The new public highway will be built on the south side of the Mapocho River, across from Costanera Norte, and will thus dramatically change the demand characteristics of the Costanera Norte proposal, almost necessitating moving it back into the realm of public provision.(34)
Social Losses From Knowledge Problems In Planning And Forecasting
A number of costly knowledge problems due to government planning failures have already been noted. One relevant concern is that it may be possible for a firm to profit from a highway concession and still leave the state holding the bag for potential risks or other costs, as was the case with the Mexico City-Acapulco highway recently. The private operator might abandon (or threaten to abandon) the infrastructure at some point and require the state to step in to maintain it, creating inefficiency and new taxes, and further beleaguering projects with government failure on account of the knowledge problem (cf. Holcombe 1995, pp.15-18). Such a strategy would be rational and could be clandestinely planned by a profit seeking firm, making it difficult for planners to foresee. There may be other rent seeking costs too that highway concession policy cannot avoid. For instance, the propensity to concentrate projects in the hands of a few larger firms over time might be unknowable to planners, and could also indicate rent seeking activity or even regulatory capture.
Good ideas and good intentions do not always lead to good planning. Inadequately informed planners have failed to implement congestion pricing schemes well, notably in Singapore (Mohring 1998, 194) where congestion pricing on one road backfired and caused greater congestion on other roads. Gómez-Ibañez (1998, pp.107-108, 111) explains that failures, such as in Singapore, result from an insuperable knowledge problem. Congestion pricing policy is difficult to implement because planners must know customer demand and cross price elasticities in order to price roads correctly. Moreover, even if these elasticities were found, still more knowledge would be needed as any price change would immediately result in some people changing their quantity demanded (i.e., road use) and thus change expected road revenues. Planners would have to know much more than just elasticities in order to estimate the outcome of any policy. Furthermore, Gómez-Ibañez (p. 124) points out that planning knowledge is limited in other areas as well. Planners do not even have an objective means to allocate joint costs between trucks and autos on highways. Any such judgments are based on equity choices rather than efficiency. Consequently, planners can not hope to have the amount of social knowledge needed to implement efficient plans such as congestion pricing (Hayek, 1945).
Semi-privatization has also met with scholarly criticism on account of its inefficiencies. Werner Hirsch raises some doubts about the effectiveness of contracting-out for road production, noting flaws in the theory of semi-privatization pointing out the limited social efficiency they produce. He argues that the popular notion that contracting-out reduces costs is "fraught with serious dangers" because (1) reduced costs are not necessarily due to increased efficiency, (2) biased samples for cost data are often used, leading to pro-contracting results, and (3) cost efficiency should not be the only thing considered when deciding to contract-out services (Hirsch, 1995). It is possible that government failures have led to both poor technology choices and poorly defined property rights that augment highway concession problems.(35)
The cost per mile of Costanera Norte could be reasonable especially considering the tunnels and trenches that would have to be built. However, the fact that the project entails constructing a relatively narrow urban road, that the project cost for labor is likely lower in Chile than in the United States, and that the average land acquisition cost is relatively low for an urban project (much of the highway will be built on vacant state-owned land along the Mapocho River), Costanera Norte might actually be relatively expensive and socially inefficient. Also, some potential concessionaires anticipate that actual project costs will be significantly higher, exacerbating inefficiencies. Therefore, it is not clear that semi-privatization has wrought the most efficient cost of production for the Costanera Norte project. Costs might even supersede those that would be expected under direct government provision.
Costanera Norte does not seem to be a marketable plan, unless one takes the perspective of a rent seeker. Alternatively, there seems to be considerable interest in building ring roads around Santiago. This fact suggests that planners have not effectively chosen the best alternative, i.e., likely not the alternative that would have risen in the market. How can planners expect to make even close to optimal choices when faced with the knowledge problem?
Accordingly, Costanera Norte may have simply been a planning error. Labbé, who in 1997 doubted the project will ever be completed (and he was right, insofar as the pure concession version is concerned), would prefer investing in light rail or some of the more cost-effective highway projects proposed, in order to alleviate congestion with the least amount of environmental damage. Weber observed that just by replacing several traffic signals on the existing roadways with overpass-underpass systems, a similar goal could be achieved for the eastern portion of the project at far less cost. Consequently, it appears that Costanera Norte is an example of a sub-optimal choice based on inadequate planning information that was contorted by political process problems.
V. HOW PRIVATE SHOULD CHILEAN HIGHWAYS BE?
There are basically three public policies under which highways may be constructed: direct government provision, semi-privatization, and plenary privatization. Direct provision policies have left much to be desired. As a result, there has been worldwide interest in semi-privatization schemes such as highway concession projects. If the Chilean concession bidding process were as transparent as Garín claims it is,(36) semi-privatization would be better than direct provision as it would reduce public choice and knowledge problems to some extent. Moreover, it might come close to producing efficient solutions (the probability of which would be hindered to the extent that public choice and knowledge problems affect the process).
For instance, efficiency gains could come through correct pricing. Taxpayer financed public works create an implicit transfer of wealth to landowners who benefit from the positive externalities of those works (to the extent that the real property taxes they pay are less than the benefits provided by them). Thus, private firms might finance highways by charging users the marginal costs and collecting rents from landowners who benefit from the positive externalities to pay for the fixed costs. However, as evident in the case of Costanera Norte, semi-privatization schemes are no panacea.
As it stands, informed support for Costanera Norte has mainly come from the government and Transroute. In a 1997 interview, Garín said that Costanera Norte is not a political issue for most people, with only one ministry and a couple mayors complaining. He thought concerns about demand, profitability, and various risks were simply unfounded. Garín maintained a practical outlook, arguing that supposed parking, ventilation, and environmental problems would not stall the project indefinitely. However, those who had to risk their resources did not agree, and Garín ended up being wrong.(37) Montelimard was optimistic about the project in 1997. Transroute has participated in many highway concessions around the world, some of the most impressive being in Australia. This worldwide knowledge, especially in dealing with government and special interest groups, would give them some competitive advantage.(38) Nonetheless, even his firm could not enter a valid bid for Costanera Norte.
Like semi-privatization, plenary privatization would be able to take full advantage of laudable market-based policies like congestion pricing to enhance efficiency. Moreover, it might be a better way to alleviate policy inefficiency and negative externalities in the production of highways. Under plenary privatization, all the elements of production would be transferred to the private sector, including the real property and business risks (via private insurance perhaps). Then tolls would serve their purpose optimally, unlike stand-alone legislation mandating congestion amelioration. Given the foregoing problems associated with semi-privatization, the optimal means of private provision effective and efficient in a social sense might be found in plenary privatization of the provision of transportation infrastructure. This would entail road owners buying (rather than condemning) all required land and insuring against all the risks (perhaps jointly with other private firms).
Privately owned and operated roads have clear efficiency advantages over public roads. As with railroads, which are able to more effectively optimize inputs because they own all their productive assets and thus internalize all costs efficiently (Gómez-Ibañez 1998, p.107), plenary privatization of roads would produce a similar desirable effect. As a step in the right direction, Bryan Caplan proposes a dual security system where people are given common stock in the road and permitted to drive on it (both rights being salable). He claims this would eliminate deadweight losses and enhance efficiency (Caplan, 1996). Furthermore, Sauter argues that congestion pricing will function best when roads are completely privatized and divorced from the political process (Sauter 1997, pp.118, 69).
Recent theoretical work has been done on allodial policy which might pave the way for policies of plenary privatization, where government would have no role in highway provision. Allodialism was a once well-known legal real property system that is now pertinent to modern discussions of privatization issues (Cobin 1997 and 1999a). With allodial policy, land and other real property (including highways) would not regulated or taxed, and could not be condemned by government for public use except, perhaps, for punishment of a crime. Succinctly, land and improved real property would be held absolutely. Instead of government planning, market-based regulation, exchange, and contracting would be relied on to allocate resources, produce transportation infrastructure, and regulate land uses. There would not be political barriers to enter the market to produce highways or other infrastructure. Rather than government regulation, contractual arrangements would be made for the use and possession of real property.(39)
Although converting to allodial policy would be dramatic and costly, it is attractive because it would provide a means to eliminate all public choice and knowledge problems. For instance, rent seeking would be eliminated since, if all real property were allodified, profiting from neighboring public works provision would be precluded since public works would simply not exist. (Further details about allodialism are included in the appendix.) As Table 1 indicates, all of the problems of semi-privatization schemes, exemplified in the Costanera Norte case, would be avoided under allodial policy.
Table 1: Problems that arise when privatization is not plenary
|Technical flaws likely to slow process and augment costs
|Doubtful cost estimates produced by regulators
|Legal hassles and political uncertainties
|Completion time problems
|End-of-term maintenance problems
|Environmentalist clashes in the political process
|Strategic use of policy by vote-seeking politicians
|Rent or privilege seeking problems
|Problems with financial guarantees in the bidding process
|Social losses: knowledge problems in planning/forecasting
In the final analysis, the fundamental policy issue does not seem to be whether roads should be privatized, since many thinkers and planners are leaning towards private solutions, but to what extent they should be privatized. Semi-privatization schemes are often considered to be "privatization", but in reality they are only a partial leap. Many links to, and problems associated with, the political process remain under semi-privatization schemes. Given the struggles surrounding Costanera Norte, a case of government failure, it is not clear that maintaining a role for government in the process is the most beneficial approach.
Allodial policy would make plenary privatization possible, eliminating public choice and knowledge problems, along with many political conflicts or obstreperous dissent associated with semi-privatization schemes. It would likely reduce the costs for contractors, and thus consumers, since government regulation would not exist. Table 2 provides a summary of many pertinent issues under each highway policy option.
Table 2: Summary of fifteen key issues under three public policy options for highway production
|Automatic tendency toward cost-efficiency (in money spent)
|Central control and route selection
|Coercive condemning of property
|Congestion pricing can be used
|Equity concerns would likely rise
|Externalities handled by market only
|Funded by direct taxes primarily
|Government bears some/entire risk
|May generate political turmoil
|Monopoly might be a concern
|Regulatory capture a possible problem
|Requires regulating bureaucracy
|Requires toll/fee-for-service roads
|Self-interest likely yields social benefits
|Tries subordinating private interests in favor of public ones
It might be that allodialism is the foremost policy solution for modern infrastructure development. However, since allodial policy is not likely to be adopted in the foreseeable future, one could argue that semi-privatization policy should be pursued in the short run. Even so, given the theoretical criticisms and practical problems associated with semi-privatization, it is worthwhile to consider allodial policy as a pure basis for market provision of highways and to include it as an option in infrastructure policy models.
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APPENDIX: SOME DETAILS ABOUT ALLODIAL POLICY
A full discussion of allodial policy may be found by reading "Allodialism as Economic Policy", chapter 15 of my book A Primer on Modern Themes in Free Market Economics and "A Policy Overview of American Allodialism", chapter 4 of my book Building Regulation, Market Alternatives, and Allodial Policy. In this appendix, I simply point out some of the more important features of this policy which pertain to the urban planning and development.
No new legislation should be enacted to make real property rights allodial. Existing legislation simply should be abolished and, possibly, a constitutional declaration needs to be made that all real property is allodial. Thus, the only policy necessary is one which directs that real property be returned to its pre-legislation absolute nature (i.e., its nature before governments claimed their unique allodial rights), with no taxation or regulation. The fact that real property would not be taxed would not imply that labor or production on it could not be taxed either. All production is done on real property, but that affiliation does not convey the legal philosophical tax exemption to human action. By analogy, while a diplomat driving his diplomatic vehicle has certain exemptions from legal rules, other persons driving the vehicle would not -- the thief who stole it for instance. Human action is not dominantly colored by any legal character of the means of production it uses.
Allodialism would positively affect the way externalities are dealt with, allow broader application of the Coase theorem, extend reliance on markets, and beneficially affect nearly every human production process, since all production ultimately is a function of land. Allodification would rely on markets to resolve externality problems involving highway production and use, with perhaps the most important means of dealing with negative externalities being through restrictive covenants. Pollution would also be handled by the price system, which efficiently allocates bads as well as goods. In highway production, markets would certainly allocate land resources to their highest valued use, especially since rent seeking would be precluded. In sum, allodial policy would facilitate private communities (Foldvary 1994, pp.86-113), market-based regulatory alternatives (Holcombe 1995, pp.96-104 and Cobin 1997, pp.92-114), and greater reliance on market incentives and restrictive covenants to alleviate negative externalities. The price system would enhance resource allocation, and create opportunities for trading real property risk on the insurance and derivatives markets (Cobin 1999a, pp.20-21).
Especially in urban areas, the transition to allodialism would be costly and may take years to accomplish. Arguably, such a change would be feasible, and the long run benefits would likely exceed its costs. Indeed, over time, there would likely be fewer long-unresolved negative externalities or environmental concerns. (All social agendas would be precluded from real property and transportation infrastructure.) Under allodial policy, the market would provide a wide variety of alternatives to satisfy a wide range of consumer risk preferences (Cobin 1999b, p.21).
The profit motive and other normal market incentives, like the desire to maintain reputation, would be paramount regulatory features under allodial policy. Allodial policy would vastly extend the function of markets, with all real property regulation being replaced by market-based alternatives. Hence, individual liberty and the demand for greater individual responsibility (enforced by contracts and private communities) would become more pronounced. Correspondingly, allodial policy would permit the implementation of highway privatization without knowledge problems or public choice problems, commencing immediately with the transition. (Of course, rent seekers who possess artificial monopoly privileges or cost savings due to their craft, would be harmed by the transition and would resist the change.)
Nevertheless, allodialism might not be a panacea. As with all novel or dramatic policy alternatives, the unknown elements should be cause for concern. For instance, allodial policy might end up facilitating greater monopoly power, which might be a special concern for those outside of the public choice pale who believe that monopoly power is not by and large the result of government failure and that unhampered markets would tend to breed more of it. Others will contend that government has a monopoly on road provision now anyway so that the concern really boils down to some people believing government would be a more benevolent monopolist than would be generated in the market process. In addition, some might raise concerns about equity issues. Under direct government provision and semi-privatization schemes, voters have some indirect control over when and where roads will be built and what districts will be benefited the most and the least. For those who believe that social justice is best accomplished through proactive public policy administered by elected leaders and the regulators they appoint, allodial policy might seem frightening. But in that case, a choice must be made whether to prefer the uncertainties of the market or the public choice and knowledge problems which occur in the political process.
- 'Nuevos Vientos Sobre el Canal San Carlos', El Mercurio, Sunday, July 12, 1998 (Propeidades section), 1, 24.
- 'Charting the Rise and Fall of Infrastructure Spending', Governing, January 1992, 61.
- 'Atecedentes para la discusión sobre reformulación de la política nacional de desarrollo urbano', Ministerio de Vivienda y Urbanismo, Republica de Chile, 1. This document, received March 27, 1997 from Instituto Libertad y Desarrollo, outlines intended urban public policy for Chile.
- Ibid., 2.
- Ibid., 4-6
- Ibid., 7-8.
- An overview of the dozen projects may be found in Prospecto Informativo: Primer Programa de Concesiones Viales Urbanas, Informe Ejecutivo, Ministerio de Obras Públicas, March 1996, 30ff. (Tr. Prospectus on the Urban Road Concessions Program, Ministry of Public Works.)
- 'Tras Rechezar Única Propuesta: Desierta Licitacion de Proyecto Costanera Norte', El Mercurio, Tuesday, February 16, 1999 (El País section), C5.
- Source: 'Typical Interstate System Cost per Mile', Document Route Symbol HNG-13 (March 21, 1997), U.S. Department of Transportation, Federal Highway Administration, Federal - Aid & Design Division. The document was received by fax on June 2, 1997 from C. Duran of the FHA. The cost per rural mile is $9.84 million and the cost per urban mile is $44.13 million.
- Because the project will be built largely over existing infrastructure and the north bank of the Mapocho river, only 109 properties will have to be condemned. Seventy of the condemnations will be made in Recoleta, a lower-middle class sector of Santiago. An additional 36 properties (four of them agricultural) will be taken from lower-middle class Renca, and only three properties will be taken from Lo Barnechea, a sector mixed with upper and lower class neighborhoods. Thus, any problems resulting from the condemnations, although not inconsequential, will likely be relatively less cumbersome than they would be if more properties were being condemned. Of course, affected real property owners will be compensated according to fair market value. Source: 'MOP Abierto a Seprar Kennedy de Costanera', El Diaro, April 8, 1997.
- The project will include 39 overpasses, five bridges, over nine kilometers of flood walls along the river bank, and four tunnels/trenches within denser areas. Potential demand by the year 2000 is expected to be between 35,000 and 115,000 vehicles per day on Costanera Norte and between 25,000 and 82,000 vehicles per day on Kennedy. Costanera Norte is a thirty year concession intended to save time and transactions costs, improve highway safety, alleviate congestion (not only by having better traffic flow on the toll road but by decongesting alternate routes used largely by buses), and reduce air and noise pollution. Resumen Ejecutivo Sistema OrienteaePoniente, Ministerio de Obras Publicas, 1997, 3. (Tr. Executive Summary of the East-West [concession] System, Ministry of Public Works.)
- Ibid., 4-5.
- Public choices are made when one person's decision is also a decision for another person (or vice-versa). Public choice theory has burst the once-dominant romantic vision of politics by suggesting that people are self-interested in all choices, including public choices. Hence, political actors primarily pursue their own self-interest, leading to distortions in the political process and public provision of goods, services, and regulation (Mitchell and Simmons 1994).
- It might be that the World Bank is indirectly (and perhaps unintentionally) perpetuating rent seeking activity by providing special funding for more "privatization", through providing "debt capital for road construction and maintenance" (Emmons and Brand 1993, 5, footnote 9).
- Likewise, complaints have been raised that construction projects are being choked by conflicting or stringent regulations, in Alabama for instance (Bemis 1997). Truckers complain that consumer prices are higher because of bungling and inefficient regulations and taxes on transportation (Donohue 1992). Many scholars, including Robert Stein, have argued that "non-direct" service modes (i.e., contract, franchise, voucher, subsidy, etc.) can be utilized most effectively by municipalities to mitigate negative externalities (Stein 1996, 20, 14). Therefore, Chilean concessions are on the cutting edge of public policy.
- An earlier study by Bruce Ingersoll and Alice Reid put the annual loss at $6 billion (Sauter 1997, 1-2).
- On Wednesday morning, June 11, 1997 from 8:45 to 10:00, I experienced a traffic jam caused by an earlier downpour leading to severe inundation at one end of Avenida Kennedy. Adding to the problem, I also noted three cars stopped and blocking the center lane (once) or left lane (twice) with their blinkers on. When I finally managed to get off Kennedy, short of my destination, I saw the sewer spewing out torrents of water through three manhole covers and exemplifying the undercapacity of the Santiago drainage system ae a problem that can also be seen elsewhere during and after a storm (on Avenida Francisco Bilbao oriente for example before being upgraded in 1998 and 1999).
- The critique of central planning by Friedrich A. von Hayek and Ludwig von Mises, the Austrian knowledge problem, says that planners will fail to provide public goods and services efficiently, and perhaps not even effectively, since social knowledge is dispersed and fragmented. By extension, this critique applies to all forms of regulation also. Even the most erudite and well intentioned planners can not expect to garner enough knowledge to make optimal decisions in the public interest, and certainly not decisions that take into account the subjective preferences of all those in society. Leonard Reid, followed by Milton Friedman, further argued that no one has the requisite knowledge to make something as simple as a pencil on account of all the knowledge that goes into its production. Note that the knowledge problem is not simply imperfect information. The knowledge problem suggests that it is impossible for government planners to allocate resources or production correctly since they cannot know the pertinent information that is implicit in prices and the market. Firms, as groups of individuals specializing in certain production, can make accurate and profitable local decisions based on cost-benefit expectations. Even though their forecasts will be in error at times, it is at least possible for them to be correct (unlike planners) and, in fact, solvent firms will be correct most of the time.
- It is also hoped that highway concessions will bring positive benefits to various real property holders, 'Camino a la Plusvalia', Qué Pasa, March 29, 1997 8-17 [tr. "Road of the Unearned Increment", noting that the word Plusvalia is commonly used in Marxian rhetoric]. Also see a memorandum numbered 403 and dated April 29, 1997, from Pablo Trivelli O. at the Ministerio de Vivienda y Urbanismo, Gabinete del Ministro, in which he outlines similar basic objectives of the ministry for urban policy.
- 'Private California Toll Road Needs Drivers', USA Today, December 28, 1995.
- The Coase Theorem basically says that where the costs of contracting are low and there is free bargaining, the assignment of property rights by a judiciary will not affect the level of negative externality. Hence, markets will tend to provide optimal externality solutions without the use of costly judicial services in such cases.
- Gordon Tullock defines rent seeking as "the manipulation of democratic [or other types of] governments to obtain special privileges under circumstances where the people injured by the privileges are hurt more than the beneficiary gains" (Tullock 1993, 24, cf. 51). James Buchanan notes, "The term rent seeking is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste rather than social surplus" (Buchanan 1980, 47).
- Information on the interviews are as follows. Interview with Alcalde (Mayor) Cristián Labbé at his office in the municipal building of Providencia on Av. Pedro de Valdivia, June 30, 1997 5:00pm to 6:30pm. Interview with Alcalde (Mayor) Joaquín Lavín Infante at his office in the municipal building of Las Condes on Av. Apoquindo, June 13, 1997 in the morning. Interview with Maximiliano Ruiz and Fernando Vergara of Infraestructura 2000 at their office in downtown Santiago on the evening of June 18, 1997. Interview with Vincente Dominguez Vial, leader of Concessiones Chilena Limitada, along with his son, at their office in Canadá 185-A, Providencia, Santiago on July 25, 1997. Interview with Carl Weber in his office in Amunategui 277, suite 1003, on Thursday, July 17, 1997 (downtown Santiago). Interview with Claudio Garín Carrasco, Manager of Urban Concessions, Ministry of public Works, in his office in Merced 753, 9th floor, on July 28, 1997 (downtown Santiago). Interview with Ives Montélimard, chief executive of Consorcio Internacional Autopistas Chilenas (Transroute), along with his son Philippe Montélimard, on the afternoon of July 14, 1997 at their office at Cruz del Sur 133, Suite 302, Las Condes, Santiago. A follow-up phone conversation with Ives was made on Januray 6, 1999 at 1pm after the near failure of the Costanera Norte project 2461232.
- Decreto Ley Numero 2,186 (June 1978), Ley Organica de Procedimiento de Expropriaciones, Apendice del Codigo de Procedimiento Civil, 325-352, especially 325 and 340ff.
- Like Chile, Mexico has implemented build and transfer concession policy for highways (Emmons and Brand 1993, 6). However, under the Mexican system, an alternate non-tolled route, often being of lover quality, is required (p. 4). Such rivalry augments the risk to the concessionaire, and will thus be reflected in cost estimates and project feasibility studies.
- Anonymous (1997), 'Postergan Concesiones en Santiago', El Mercurio, May 15, A1, A11, and Anonymous (1997), 'Positivo Informe de Impacto Ambiental', La Tercera, May 8, 3.
- The three firms are Endesa, Tribasa, and Delta. Anonymous (1997), 'Tendencia a la Concentración en Concesiones Viales', Estrategia, March 31, 1, 51.
- It might be of some interest to note that most of the bidding firms are not Chilean. As of April 1997. Ten of the potential concessionaires prequalified for the estimated $313 million project were foreign while only three were Chilean. See 'En Junio Adjudican Costanera Norte', Estrategia, April 4, 1997, 32.
- Anonymous, 'Acuerdo Preliminar en Costanera Norte', El Mercurio, Tuesday, August 25, 1998 (El País section lead story).
- Anonymous (1998), 'Fracasó Licitación de la Costanera Norte', El Mercurio, Thursday, December 31 (cuerpo Portada lead story) and Anonymous (1999), 'Continúa en Análisis Proceso de Licitación', El Mercurio, Wednesday, January 6 (section El País), 7.
- 'Tras Rechezar Única Propuesta: Desierta Licitación de Proyecto Costanera Norte', El Mercurio, Tuesday, February 16, 1999 (El País section), C5.
- 'MOP dispone "revisión completa" de su plan de concesiones viales en Santiago', El Diaro, January 6, 1999, 5.
- Anonymous (1999), 'Gbno. Reactiva Concesiones Viales en Stgo.', El Mercurio, Tuesday, May 4 (front page), A1ff.
- Anonymous (1999), 'Nuevo Eje Urbano para Santiago: US$53 Millones Valdrá La Avda. Costanera Sur', El Mercurio, Thursday, April 22 (section El País), C1, C2.
- Some scholars argue that the "status quo" system of property rights, especially upon given public choice and Pigouvian or command and control type perspectives, makes human existence bellicose (Dragun and O'Connor 1993). Others use path dependence theory to argue that pollution and other things commonly classified as negative externalities are really the consequences of poor technological choices, rather than poorly defined property rights (Goodstein 1995). A policy change towards plenary privatization and absolute real property rights might facilitate a means of achieving better technology and well defined property rights, as well as the elimination of rent seeking.
- Garín says that bidding for Chilean concessions is straightforward and transparent, with no political favoritism being shown to any firm (domestic or foreign). Each firm must prepare two proposals: one economic and the other technical. The technical proposal must demonstrate that the company will meet all the mandated specifications, and, if it does, the only selection criteria left to consideration is the cost, with the lowest bid winning. (The selection committee must give unanimous approval to the technical specifications.) A maximum time limit for project completion will be imposed on the winning firm. Firms have no advantage in preparing a bid that will permit completion of the project in less time, since the bid price, rather than speedy delivery of the goods, is the only economic variable considered in the bid selection. Nevertheless, people will always wonder if there is favoritism in bidding. Even under competitive bidding, an incentive might exist to favor one group over another by biasing the technical specification or auction process criteria in its favor.
- Garín claimed that exhaustive studies have been done, including studies which estimate demand, suggesting that a 13% rate of return is feasible. (The demand study was not available for review, although it was requested and promised by Garín during his interview.) He swept away pragmatic objections to the plan by the mayors and potential concessionaires, noting that fines of forty times the amount of the toll have been legislated and would serve as an effective deterrent against toll violation, even if only three percent of violators are apprehended. Since the Ministry of Public Works built most of the Kennedy project, he thought Mayor Lavín should be content to receive compensation for what Las Condes invested and not expect more. Las Condes would be reimbursed for the portion of the Padre Hurtado and Geronimo overpasses that were built with municipal funds. He further noted that it is impossible to please all interests and to have an optimal environmental solution (i.e., where highways are produced without any negative environmental consequences). Garín emphasizes that only a minority of people are complaining about the project, and that business interests (historically) always complain about technical plans. He did expect the cost estimate for the project to rise, but nothing close to the sixty percent increase feared by Dominguez.
- Ives Montélimard said that the French-Spanish conglomerate he represents (Transroute) is not easily dissuaded by technicalities and governmental uncertainties. He indicated that there might be some politicizing about the project, noting that it would help Minster Lagos more than hurt him. Localities would be compensated for the costs they incurred building Kennedy, which he thought would be improved (in terms of congestion and noise) if tolls were added to it. (Of course, if no toll were added to Kennedy the entire project would collapse since people would prefer to use it instead of the Costanera portion running parallel.) He also indicated little concern about people evading the tolls, especially since the Chilean authorities have such tight informational controls over motorists which is linked to other aspects of their lives (including credit). Thus, incentive and institutional frameworks are in place to make the project work.
- Things such as subdividing or leasing, or selling off portions of absolute real property holdings, and owning real property jointly as corporations or trusts would not be precluded by allodial policy. Moreover, the absolute nature of ownership, use, and possession of real property, does not imply a justification for committing crimes with it against the negative rights of others.
- El Mercurio, Sunday, April 6, 1997, economía y negocios enfoques section.
- El Mercurio, Sunday, July 12, 1998 (Propeidades section), p. 24.
The following maps of the project were provided by the Ministry of Public Works (figures 1, 2 and 3) and El Mercurio (figure 4).
Figure 1: Santiago metro area with route of Costanera Norte (source: MPW)
Figure 2: Costanera Norte's route through various municipal districts (40)
Figure 3: Route of the Costanera Norte concession (41)
Figure 4: Short term expansion plans for transportation infrastructure (especially the San Carlos monorail) (42)