Corruption and renegotiation – lessons from Chile

Chile’s concession programmes clearly bring to the fore how persistent renegotiations can put in doubt the legitimacy of a relatively successful public-private partnership (PPP) programme. The country now has a successful and mature highway concession system despite the teething problems that were experienced. This was after Chile realised the magnitude of corruption and arbitrary renegotiations of their PPP projects. A law was passed way back in 1991 for the government to award concessions for projects in roads, seaports, airports, water and sanitation, hospitals and prison services. Over 50 projects with a cumulative value over $11 billion had been awarded at the end of 2007.

PURCHASING & SUPPLY: Nyasha Chizu

The concession programmes on roads awarded between 1993 and 2007 were classified into three segments. The first segment was the Pan-American Highway, which was sliced and diced into eight sections of double lanes spanning across 1 500-kilometre stretch. The second segment was comprised of 13 inter-urban highways and a number of local roads with the last segment involving five urban highways in Santiago.

The design of the Pan-American Highway was such that the tolls per kilometre would be standard despite the practice differences in demand across each segment.

Lack of expertise to manage concessions and the non-availability of an external regulatory framework was the major shortcoming. This led to the lead agent, the ministry of Public Works to relax the enforcement of contracts. Corruption cases started to rise in 2002 in the ministry of Public Works PPP unit. The unit was poorly resourced and continued to lose skills due to the low salaries that were offered by the Chilean government.

The PPP unit of the government then started to engage diverse institutions to provide non-existent services. The diverse institutions would then contract the employees of the Chilean PPP unit. The moonlighting allowed the PPP unit to retain staff on the motivation for services in the private sector. This brought about inefficiencies that committed the Chilean budget for several years.

This situation was compounded by the conflict of interest of the PPP unit staff that was now compromised to provide independent assessment on the work they were involved in the moonlighting exercise. The discovery of such corruption was far reaching to the extent of nearly causing the resignation of that country’s President, who was the responsible minister during the execution of the contracts.
The President only managed to disconnect himself by agreeing to a total reform of public hiring practices. Public Works minister Carlos Cruz was, however, not spared and was condemned to several years in prison.

The Chilean law had quality management mechanism that required that projects must be established within the time limits and, thereafter, provides uninterrupted quality of service consistent with the bid accepted. The ministry of Public Works was then responsible for supervising the construction and operation of the PPP arrangement.

Additional works ordinarily prompted renegotiations and the government deliberately avoided them even when it had an impact to increase welfare. In Chile’s case, renegotiations were called for when the project scope varied and the law provided a framework for such renegotiations which were rampant between 2001 and 2007. At the end of 2007, 50 concessions awarded between 1993 and 2007 had been renegotiated over 144 times every two and half years.

Renegotiations in Chile were a means of increasing concessionaire’s revenue or to compensate for additional works. The government had an option to pay directly, through tariff increases or term extension. The renegotiations had no immediate impact on the public budget, but had profound implications on future administration. This then led to a major reform of the legislation to reduce corruption and renegotiations.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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