Renegotiating public-private partnerships

Joaquim Miranda Sarmento,Luc Renneboog

doi:10.1016/j.mulfin.2020.100661

Joaquim Miranda Sarmento, Luc Renneboog

Open Access

https://doi.org/10.1016/j.mulfin.2020.100661

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Abstract

Public-Private Partnerships (PPPs) are frequently renegotiated as their contracts are long-term, often with a duration exceeding 30 years, involve major investments, and are necessary incomplete. Still, while contract incompleteness is difficult to prevent, renegotiation frequency does not decline in spite of decades of experience. Electoral cycles and political connections lead to strategic behaviour by both the public sector, intending to please the electorate, and the private entity, often taking advantage of the fact that the government cannot afford disruption in public services prior to elections. The bargaining power is held mainly by private firms/corporate consortiums who extract additional rents to compensate for underbidding at the initial bidding rounds. When a consortium dominated by a foreign firm, the frequency of negotiations is higher but the extraction of rents from renegotiations is lower, reflecting a lower degree of political connectedness. Experience with PPP projects does not reduce the likelihood of subsequent renegotiations. In spite of the recommendations of the PPP supervisor (the Court of Audit), the public sector has not implemented improvements in contract design and renegotiations clauses of PPP contracts.

Highlights

Over the last few decades, Public-Private Partnerships (PPPs) have been increasingly used by governments around the world to finance and manage complex operations
We examine the renegotiation clauses in the PPP contracts and how they were adjusted over time
Rational arguments aiming at the long-term viability of the agreement are not the only triggers of contract renegotiations, as we show that opportunistic behaviour by both the public and private sector can arise, that the legal and institutional context matters, and that learning at the bidding and the renegotiation processes is limited

Summary

Introduction

Over the last few decades, Public-Private Partnerships (PPPs) have been increasingly used by governments around the world to finance and manage complex (infrastructural) operations. One of the criticisms of PPPs is that the high rate of renegotiations undermines the credibility of the initial bids by the private sector: bidding parties may anticipate renegotiations (that will subsequently tilt the balance in their favour), which affects the (ex-ante) bidding competition and the (ex post) efficiency of PPPs. PPP contracts are by nature more prone to renegotiations, because they are long-term, complex, and incomplete contracts. PPP contracts are by nature more prone to renegotiations, because they are long-term, complex, and incomplete contracts They occur in heavily regulated sectors that are sensitive to political and circumstantial changes. These factors, combined with high levels of investment, result in greater uncertainty

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