By Paul Constance

Sometime this year, commuters in the Chilean capital of Santiago will experience a long-awaited dose of relief when portions of a new four-lane highway running north–south through their congested city finally open to traffic.

Instead of repeatedly stopping and starting at red lights as they do today, drivers will speed along at up to 120 km per hour, thanks to dozens of new overpasses that will allow east–west traffic to move unimpeded. The new highway, known as Autopista Central, is one of four under construction in Santiago as part of the most ambitious urban road-building program underway in a major Latin American city. Indeed, road-building machinery, mounds of rubble and detour signs seem to be everywhere in Santiago.

Though the construction has aggravated congestion, the future rewards are tantalizing. When the program is completed in 2005, Santiago will have a network of four-lane peripheral and transversal highways linked by a sophisticated traffic-management system based on electronic tolls. Combined with ongoing improvements to public transportation, the new road system will give Santiago one of the most advanced urban transportation infrastructures in the developing world.

Depending on where they start, drivers will cut between 40 percent and 60 percent off the time they currently spend commuting. There will be no waits at tollbooths, because tolls will be charged via electronic sensors attached to each car. Congestion will be discouraged through lower toll fees during off-peak times.

Santiago’s air pollution will be alleviated as people spend less time driving and idling at intersections. The number of traffic accidents at intersections will drop sharply. In one of the city’s most congested areas, a significant portion of vehicular traffic will simply disappear from view, thanks to an innovative tunnel that will run for 4 km beneath the city’s Mapocho river. Santiago’s citizens will also enjoy hundreds of acres of new parkland built along the edges of the highways, and they will use dozens of lighted pedestrian overpasses instead of risking injury by crossing at ground level.

“It’s a revolution for the city,” Joaquín Lavín, mayor of Santiago, told El Mercurio newspaper in October 2003. “[The highway] goes through our downtown area, so it will benefit local residents who will enjoy shorter driving times, less congestion, and above all, less pollution.”

Héctor Silva, mayor of the neighboring La Cisterna district, told El Mercurio that in addition to improving transportation and the urban environment, the highway has a singular advantage: “It won’t cost us a single peso.”

Mold-breaking. Like all countries, Chile has struggled to balance the need for investments in infrastructure with the pressing demand for better social services. During the final decades of the 20th century, the country’s infrastructure spending did not keep pace with its economic growth, creating serious bottlenecks for producers who depend on roads, seaports and airports to market their goods. When democracy was reestablished in the 1990s, the new civilian administration was under pressure to expand social services while improving Chile’s competitiveness—all on a limited budget.

The government concluded that the best way to raise the vast sums required for infrastructure was to partner with private investors by granting long-term concessions to operate specific services. In 1994, assisted by a $1.4 million technical cooperation grant from the Multilateral Investment Fund, a member of the IDB Group, officials in Chile’s Ministry of Public Works began to put together a legal and regulatory framework for infrastructure concessions that drew on lessons learned throughout the industrialized world. They were careful to ensure that the rules of the concession program were fair, transparent and supported by both investors and the public.

The government launched the concession program in the mid-1990s with a series of competitions open to both national and international firms. The first priority was to rebuild Chile’s “backbone road:” a 1,500-km highway that runs from La Serena in the North to Puerto Montt in the South. Known as Ruta 5, the highway connects Chile’s largest cities and runs through areas that produce 78 percent of its industrial goods and 94 percent of its agricultural outputs. The project was so huge that the Ministry of Transport divided it into eight individual concessions, each averaging 200 km, which required a total of $2.3 billion in investments by the winning firms.

During the same period, the government awarded concessions for several other key highways designed to facilitate transport for Chile’s forestry, mining, agriculture and tourist industries, and to speed traffic between Santiago and the country’s most popular coastal resorts. In most cases, the original two-lane roads were replaced with four-lane highways with dividers. New access ramps and overpasses ensured that local communities would have safe and speedy means to access or to cross the highway.

“These are world-class highways,” says Julio Ángel, the IDB’s representative in Chile. “Accidents and travel times have dropped more than expected throughout the country, with the added benefit that public resources that were previously spent maintaining bad roads have now been redirected toward social investments. And people are willing to pay for better service.”

From roads to airports. Despite the skepticism of many observers, most of these early concessions exceeded expectations. Producers enjoyed lower transportation costs, diminished congestion and improved road safety. Boosted by the success of the first concessions, the government decided to extend the concept to other sectors. The growth of Chilean industries exporting perishable goods such as fresh fruit and farmed salmon, for example, had put unprecedented pressure on Chile’s airports to handle huge volumes of air cargo and surging passenger traffic. After making the necessary adjustments to its concessions law, the Ministry of Public Works called for bids from companies interested in upgrading and operating Chile’s principal airports for periods ranging from 8.5 to 16.5 years. Between 1995 and 2000, the government awarded contracts to refurbish and operate eight of the nation’s key airports—including a $220 million concession to build new terminals at Arturo Merino Benítez airport in Santiago. The winner of a related road concession in 1998 constructed a multilane access road to the same airport and included Chile’s first electronic toll system.

As a result of these concessions, these airports today have world-class passenger and cargo terminals and the capacity to absorb projected growth for many years to come.

Chile is now adapting the concession concept to meet an even wider range of infrastructure needs. Government ministries are either executing or preparing concession programs for water and sanitation services, rail lines, urban and interurban public transportation (including buses and light rail), irrigation systems, ports, and customs processing.

An exportable model. Given the notorious failure of road concession programs in some Latin American countries, what specifically accounts for Chile’s success? According to IDB Representative Ángel, a big part of the answer lies in the legal and regulatory environment that the government put in place at the inception of its concession program. The institutions that manage the concession program are widely viewed as stable, technically competent and immune to political meddling or clientelism, according to Ángel, and this has helped to attract hundreds of investors.

Chile also developed a sophisticated approach to managing the financial risk inherent to long-term infrastructure investments. For example, Chile offers concession holders minimum revenue guarantees and special mechanisms for managing exchange rate fluctuations and issuing bonds to cover construction costs. The IDB has supported the latter mechanism in the case of two large highway concessions by issuing bond guarantees in partnership with private construction companies (see links to press releases at right).

Chile has also been careful to assign risks to the party best qualified to assume them. Construction risks, for example, are assumed entirely by the concession holder. But the risk of resolving problems related to the expropriation of private property prior to construction is assumed by the government. Given that problems with expropriations have hobbled concession programs in many countries, Chile’s approach is considered a vital aspect of the overall program’s success.

Finally, Chile has made it a priority to include citizen input in the concessions program. The government instituted a formal process of community-level consultations and conflict resolution forums for every concession project. These meetings allow potentially affected citizens to voice their objections and affect the ultimate design of the project.

In some cases, most notably in the proposed construction of a bridge linking the mainland to the island of Chiloé, citizen concerns have postponed the start of construction for several years.

For all these reasons, the Chilean concessions “model” has succeeded in meeting the needs of citizens, producers and concession holders to a degree without precedent in Latin America and the Caribbean. Though it has generated its fair share of controversy—a newspaper editorial in Santiago recently speculated that citizens might someday be overwhelmed by the proliferation of fee-based public services—the Chilean concessions program is now studied by governments throughout the world. Indeed, it has become yet another successful Chilean export.