How profitable are private infrastructure concessions in Latin America?

This paper estimates the returns that private investors in infrastructure projects in Latin America really made on their investments, and assesses the adequacy of these returns relative to the risks taken-the cost of capital-and the impact that the quality of regulation had on the closeness of alignment between returns and the cost of capital. This is done by estimating both historical and projected future returns earned by a sample of private infrastructure concessions, across a variety of Latin American countries and infrastructure sectors, and comparing them against expected returns given the level of risk taken-the cost of capital. In this way, it is possible to evaluate whether or not private investors did earn abnormally high returns on their investments as popular belief and politician against PPI often claim. The paper develops a quality of regulation index and examines the extent to which the quality of the regulatory framework contributed to maintaining a closer alignment between rates of return and cost of capital, or did allow for the capture of excessive rents by the investors or of excessive benefits by the users at the expense of the investors. The findings of this paper are that contrary to general public perceptions, the financial returns of private infrastructure concessions have been modest and that in fact for a number of concessions the returns have been below the cost of capital. On average telecom and energy concessions have feared better than transport and water. It also shows that the variance of returns across concessions and countries is considerable. The variance of returns across concessions can be partially explained by the quality of regulation. It shows that the better the quality of regulation the closer the alignment between financial returns and costs of capital as is desirable. Thus, the paper shows and validates the claim that regulation indeed matters.