Economic regulation to supplement bidding for public works contracts

Concessions for public works projects have enabled Chile to modernize its infrastructure; however, these arrangements have also raised certain issues that make it necessary to change the rules governing the system. The main problem has been the addition of numerous supplementary agreements to the original contracts. Under the present system, renegotiations are not conducted according to criteria of economic efficiency, and they can therefore affect public finance and lead to opportunistic behaviour, affecting the efficacy of the bidding process. A regulatory system allowing for compensation of investors when it is not feasible to put out a new tender is more consistent with economic theory and provides a better way to assess the economic value of a project that has been changed. Bidding does not replace regulation: rather, because contracts are bound to be incomplete, the two methods complement each other as mechanisms for including private investment in public projects.