Private Infrastructure Concessions: The 1989-1994 National Highway Program in Mexico

Abstract:     
In the late 1980s Mexico, like other emerging economies, embarked upon an accelerated expansion of its toll highway system by offering concessions to the private sector for construction and operation. The government awarded Build-Operate-Transfer (BOT) contracts where a private entity builds the infrastructure and operates it for a specific period. Then, in theory, once the private entity has recovered its investment and obtained a certain return, the infrastructure reverts to the public sector. This model has gained wide acceptance not only to roads but in water supply and power. However, agency cost in imperfectly competitive markets, like network industries, often led to opportunistic behavior by concessionaires. Income guarantees should be used as incentive devices before demand and political risk to reward efficiency throughout project life span instead of serving as a means of indiscriminate compensation. An alternative to such contracts is proposed when the full transfer of ownership rights to the infrastructure assets is not feasible.

JEL Classifications: H54, H57, L91

Working Paper Series