Economic regulation to supplement bidding for public works contracts

Abstract

Concessions for public works projects have enabled Chile tomodernize its infrastructure; however, these arrangements have alsoraised certain issues that make it necessary to change the rules governingthe system. The main problem has been the addition of numeroussupplementary agreements to the original contracts. Under the presentsystem, renegotiations are not conducted according to criteria of economicefficiency, and they can therefore affect public finance and lead toopportunistic behaviour, affecting the efficacy of the bidding process. Aregulatory system allowing for compensation of investors when it is notfeasible to put out a new tender is more consistent with economic theoryand provides a better way to assess the economic value of a project thathas been changed. Bidding does not replace regulation; rather, becausecontracts are bound to be incomplete, the two methods complement eachother as mechanisms for including private investment in public projects.