Anatomy of public-private partnerships: their creation, financing and renegotiations

Abstract

Purpose– As public-private partnerships (PPPs) have become more widespread, doubts and criticisms about this type of infrastructural projects have emerged. The authors describe the PPP framework, discuss the financial structure and risk-sharing processes, and dissect the structure and organisation. The authors address the following questions: what are the main organisational characteristics of PPPs? How does the private sector structure and finance PPPs? And why and how are PPP contracts renegotiated? The paper aims to discuss these issues.Design/methodology/approach– This paper draws on extensive theoretical and empirical research, which is presented in a literature overview on PPPs and their renegotiations. A comprehensive review is carried out and two case studies are developed to investigate the reasons behind success and failure of PPPs and the renegotiation of contracts.Findings– Incomplete contracts and the long duration of concessions can bring uncertainty and change to PPPs. Joint decision making can be difficult due to different parties involved. Renegotiation outcomes tend to rely on the position of the government. In Fertagus, the private sector asked for financial help led to a very balanced agreement. Conversely, Lusoponte renegotiations were initiated by the government, which significantly changed the project. Instead of relying solely on commercial revenues, Lusoponte was substantial financed by public funds.Research limitations/implications– Incomplete contracts and the long duration of concessions bring about much uncertainty to PPPs.Ex postdecision making in PPPs in the wake of changing risks is difficult as it necessarily involves negotiations between the public sector and the private firm. The paper shows that marked differences in renegotiation outcomes emerge. In one case study, the private sector asked for financial help and the negotiation outcome was a very balanced agreement. Conversely, renegotiations in a second case were initiated by the government mainly for political reasons, resulted in a significant change in the PPP’s structure, risk, financing, and returns, and yielded a large public losses.Practical implications– Contrasting successful and unsuccessful PPPs enables the reader to examine the opportunities and pitfalls in case of PPP renegotiations, which frequently occur. He can gain insight in the determinants of negotiation outcomes and the importance of a governmental PPP entity as well as of an independent monitor such as a court of audits.Originality/value– This paper should be useful for both academics and practitioners and should help increase the understanding of the several stages, structures, and renegotiation processes associated with PPPs.