Renegotiation of Public-Private Partnerships

March 22, 2016

Over the last decades, Public-Private Partnerships (PPPs) have become a popular means for governments to build and maintain large infrastructure and public services. Portugal has used PPPs intensively (by 2011, it was the European country with the highest investment in PPPs as a % of GDP), mainly for highways. This paper raises the issue of why PPPs are so frequently renegotiated, and what effect those renegotiations have on PPP efficiency. We analyse who – the public or private party – initiates the renegotiation of the PPP contract and which reasons for renegotiations are most common. We also examine the outcomes of those renegotiations in terms of which party gains most from the renegotiations, and the potential learning from successive renegotiations (in terms of negotiations tactics, and supervisory and regulatory initiatives).

Renegotiating PPPs seems to be a structural issue: there were 254 renegotiation events for the collective 35 Portuguese PPP contracts since 1995. We document that larger PPP projects are more often renegotiated, especially in the operational stage of the PPP. Elections and political connections affect the probability of renegotiation: in the year of and the year prior to elections renegotiations tend to occur more frequently and are mainly initiated by the private sector. Also, PPPs with Portuguese shareholders, such as the politically well-connected Ascendi Group, renegotiate more and obtain higher returns. In contrast, a stable legal framework (with strong claim’s enforcement and low levels of corruption) and prosperous economic environments reduce the likelihood of renegotiations. The 2006 PPP law that aimed at making the contracting and supervisory process more transparent and efficient was not effective in reducing renegotiations (which may have been triggered by worsening financial circumstances resulting from the financial crises of 2008 and onwards). We also demonstrate that ‘strategic’ behaviour arises by both the public and the private sectors as the public sector seeks political benefits prior to elections by pleasing its electorate whereas the private sector seeks to extract higher rents prior elections when its bargaining power is strongest. We also document that the learning from renegotiations on the public sector’s side, in terms of contract design and execution of regulatory change, is modest.

Click here to go to the paper by Sarmento and Renneboog


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