1. INTRODUCTION TO PUBLIC INFRASTUCTURE IN CHILE – 15 Chapter 1 Introduction to public infrastructure in Chile Chile has been successful in building its key transport and water infrastructure over the past 25 years, which serves as structural backbone that are essential for economic development and welfare. However, circumstances are changing with implications for the needed infrastructure investment. This Chapter provides an introduction to the development of public infrastructure in Chile and gives an overview of the challenges that lie ahead. GAPS AND GOVERNANCE STANDARDS OF PUBLIC INFRASTRUCTURE IN CHILE © OECD 2017 16 – 1. INTRODUCTION TO PUBLIC INFRASTUCTURE IN CHILE Background Chile has been successful in building up its key transport and water infrastructure. Over the past 25 years, Chile has successfully rolled out many of the key investments in the country’s basic infrastructure backbone that are essential for the country’s economic development and welfare. Rapid investment in infrastructure has sustained impressive economic growth rates and improvements in the Chilean population’s standard of living. GDP per capita has increased from USD 4 787 in 1990 to USD 22 197 in 2015. Chile has also achieved universal access to basic services that are essential to wellbeing, such as drinking water and sewerage systems (Ferro and Mercadier, 2016). While growth has led to significant overall reductions in poverty (OECD, 2015), it has relied heavily on capital accumulation (IMF, 2015) and has been geographically uneven (OECD, 2011). Major economic infrastructures such as the highway network and port system have been built over the past two decades. Chile boasts a high quality and well-maintained highway system that links major cities and provides good north-south connectivity over the length of the country. Within the decade from 2004 to 2014, total container capacity at Chilean ports more than doubled, and the productivity of maritime transport at the port level is among the highest in Latin America. Major urban infrastructure projects such as the Santiago metro system and the city’s ring roads have sustained the capital’s economic and demographic growth. Between 1985 and 2013, Chile managed to expand its wastewater treatment capacity from 0 to 100%. Finlally, Chile has managed to develop this infrastructure efficiently and to a high standard, which is a testament to the quality of the country’s institutions (IMF, 2016). This success can be ascribed, in significant part, to the strength of Chile’s institutions and the capacity of its public administration. The Ministry of Public Works’ (Ministerio de Obras Públicas – MOP) experience and capabilities in preparing and executing projects have been instrumental in delivering the country’s high-quality infrastructure. Chile’s public investment system benefits from a well-institutionalised social evaluation process that has contributed to ensuring that infrastructure investments are of good quality and generate value for money. In addition, the Ministry of Finance has played an important gatekeeper role by reviewing and approving projects to ensure that they are affordable and do not compromise financial stability. Nevertheless, Chile’s processes must be refined and updated so that evaluations of projects and programs better reflect an integrated approach to long term development. Chile has also been successful in mobilising private financing for the development of its infrastructure. It has adopted and refined the concessions model for delivering infrastructure, a major factor explaining the speed with which it has been able to build its extensive highway network. In the two decades since the launch of the concessions programme in 1992, Chile has procured 82 projects worth a total of USD 19 billion, and built or rehabilitated 2 500 kilometres of highways using this mechanism (MOP, 2016). It has also introduced innovations into the concessions model such as contracts based on the “least present value of future revenues” which helps to reduce demand risk (Box 1.1). GAPS AND GOVERNANCE STANDARDS OF PUBLIC INFRASTRUCTURE IN CHILE © OECD 2017 1. INTRODUCTION TO PUBLIC INFRASTUCTURE IN CHILE – 17 Box 1.1 Reducing demand risk in highway concessions Highway concessions financed by tolls paid by users face significant demand risk. This is due, in part, to the uncertainty around the price-elasticity of demand for roads, as well as the inherent difficulty of predicting future traffic over a long time period. Such schemes are inevitably subject to the vagaries of economic cycles and other unpredictable changes in the economic circumstances affecting demand for the asset. Traditional auctions typically involve fixed-term contracts based on the lowest toll, which leaves the concessionaire facing elevated demand risk. In order to reduce the high level of demand risk which results in an increase in the risk premium required by investors and a greater likelihood of renegotiations, the MOP in 1994 introduced a new mechanism for adjudicating concession contracts, one called least present value of revenue (LPVR) auctions. The first concession was awarded on this basis in 1998 for Route 68, the highway between Santiago and Valparaiso (MOP, 2016). Under this system for awarding concession contracts, the contract’s duration is variable, only ending once the present value of revenues has been reached. In the case of lower than expected toll revenues, the contract gets extended so that the concessionaire obtains the agreed-upon present value of revenues. The method also allows for the possibility of adjusting toll levels, for example, if demand is lower than expected, without affecting the underlying economic value of the contract. Such a system thus goes a long way towards eliminating demand risk. It also provides a transparent basis for compensating the concessionaire if the government decides to terminate the contract early (Engel, 2001). Since its adoption, numerous highway concessions have been procured using the LPVR method. Moreover, in spite of the potential variability in the value of payments, banks and other lenders have accepted this mechanism because it reduces the likelihood of failure of the project company. Source: MOP (2016), Concesiones de Obras Públicas en Chile – 20 años, Ministerio de Obras Publicas, Santiago; Engel (2001). A changing context The circumstances that shape infrastructure investment needs are changing. Many of the key investments in the basic infrastructure backbone that are essential for economic development and welfare have been completed. In the road sector, the main vertical north-south highway (Route 5) and most transversal arteries linking the key cities have been built. Access to potable water and sanitation services is practically universal (99% access to improved water sources and sanitation facilities in 2015), as is access to electricity from the national grid. The increase in coverage of basic roads, rural drinking water systems and rehabilitation of fishing coves has been significant. While these investments have had clear economic benefits, future investments choices may be more difficult and marginal returns may be lower. As will be highlighted in the chapters on transport and water, infrastructure gaps still do exist, although the nature of these gaps is shifting to issues such as regional inequality, equal access, welfare and quality of life. For instance, there are great disparities in the quality of infrastructure from region to region. The same can be said with regard to national-level and local-level infrastructure. While national infrastructure of strategic importance such as the main highways is built and operated to meet exacting international standards, urban roads are often of lower quality and poorly maintained, despite Chile’s increased efforts in remote and isolated areas. Finally, there are significant gaps with regard to negative externalities such as congestion, air pollution and road safety, which have emerged as a consequence of economic development. In response to public demands, the current government has prioritised social sectors such as education and health. This is in many ways consistent with Chile’s transition from a middle income to a high-income country. However, this means that, in the future, GAPS AND GOVERNANCE STANDARDS OF PUBLIC INFRASTRUCTURE IN CHILE © OECD 2017 18 – 1. INTRODUCTION TO PUBLIC INFRASTUCTURE IN CHILE traditional infrastructure investment may increasingly need to compete for resources with the social sectors. While it may not result in an overall reduction in infrastructure investment, Chile may experience a shift in the types of infrastructure being built, with perhaps more hospitals and schools and fewer major transport projects. Chile’s economy has experienced a slowdown in recent years as a result of lower global growth in general and a drop in demand for copper in particular. With the end of the commodity super-cycle, Chile may face lower medium- and long-term growth prospects (IMF, 2015). This reduces resources available for public investment. On the other hand, the right infrastructure investment, performed well, can contribute to productivity growth. In addition, Chile may benefit from a rebalancing of its economy from the export of natural resources to manufacturing and services. Infrastructure will have an important role to play in supporting economic diversification. Choices regarding what kinds of infrastructure to build will therefore need to be informed by a vision of the evolving structure