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Market Provisions of Highways: Lessons from Costanera Norte

John M. Cobin
Professor of Economics and Public Policy
Universidad Finis Terrae,
Santiago, Chile


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.



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.

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