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Journal of Regulatory Economics

, Volume 45, Issue 2, pp 209–232 | Cite as

Regulation, renegotiation and capital structure: theory and evidence from Latin American transport concessions

  • Alexander MooreEmail author
  • Stéphane Straub
  • Jean-Jacques Dethier
Original Article

Abstract

We examine the capital structure of regulated infrastructure firms. We develop a model showing that leverage, the ratio of liabilities to assets, is lower under high-powered regulation and that firms operating under high-powered regulation make proportionally larger reductions in leverage when the cost of debt increases. We test the predictions of the model using an original panel dataset of 124 transport concessions in Brazil, Chile, Colombia and Peru over 1992–2011. For each concession we have data on the regulatory regime, annual financial performance and contract renegotiations. We begin by demonstrating that, although pervasive, contract renegotiations do not fundamentally alter the regulatory regime. Importantly, firms are not systematically able to renegotiate when in financial difficulty, implying that price cap contracts remain high-powered in practice. We use this result for our main empirical work, where we find broad support for our theoretical predictions: when the cost of debt increases, firms operating under high-powered regulation make proportionally larger reductions in leverage.

Keywords

Infrastructure Regulation Capital Leverage  Latin America 

JEL Classification

G11 L51 N26 

Notes

Acknowledgments

We thank Lorena Lizarazo for excellent research assistance. We thank Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público (OSITRAN) in Peru, Agencia Nacional de Infraestructura (ANI) in Colombia, Luis Guasch and Alexander Galetovic for sharing data. We are grateful to Lincoln Flor and Camila Rodriguez for providing advice and contacts. We thank the editor, two anonymous referees, Jane Ansell, Tim Besley, Philippe Gagnepain, Marian Moszoro, Marcia Schafgans and participants at the Workshop on Procurement and Infrastructure in Toulouse, the Chaire EPPP Conference on Contracts, Procurement and Public–Private Arrangements in Florence and the Financing Infrastructure in Crisis Times workshop in Paris for helpful comments and suggestions.

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  • Alexander Moore
    • 1
    Email author
  • Stéphane Straub
    • 2
  • Jean-Jacques Dethier
    • 3
  1. 1.The World Bank and London School of EconomicsLondonUK
  2. 2.Toulouse School of EconomicsToulouse Cedex 6France
  3. 3.The World BankWashingtonUSA

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