Renegotiating Public-Private Partnerships

Abstract

The renegotiations of public–private partnership (PPP) contracts are commonly considered to be one of the pitfalls of PPPs, as they tend to undermine their (ex ante) efficiency. A renegotiation occurs when specific events change the conditions of a concession, frequently leading to a financial claim from the private sector on the public sector. This paper examines the Portuguese experience with PPP renegotiations by means of a unique panel data of 254 renegotiation events from 1995 to 2012. We find evidence of opportunistic bidding for PPP contracts, which is ex post – after the contract is won and the competition eliminated - leading to renegotiations to increase revenues. Renegotiations last on average 1.8 years. Majority governments are more prone to renegotiate and have more political clout to limit the renegotiation duration. There is no evidence of more renegotiations in election years or when there is a change in government. A better institutional framework, defined as a low country risk, a strong rule of law, and lower corruption, tends to reduce the probability of renegotiations. There is also evidence that at times of higher corruption, more renegotiations occur. The project’s leverage decreases the renegotiation duration. Strong initial bidder competition for a PPP contract leads to long subsequent renegotiations between the winning private party and the government.