As PPP contracts are long term in nature, they will be exposed to various external changes arising from political, social and economic circumstances over their duration. As such, renegotiation is likely to occur at some stage during the contract term.
Renegotiation is a significant event in a PPP project as a change to the contract can have a major impact on the success or failure of a project, can demand significant resources and time from the Procuring Authority to effect, and can lead to disputes over the life of the contract.
The essence of renegotiation centres on the allocation of risk. Appropriate allocation and management of risk is an important aspect of ongoing financial sustainability, and any changes to the PPP contract may alter the risk allocation.
Renegotiations carry the risk of being adverse to the interests of the public good. For example, parties may initiate a renegotiation because of a change in the competitive landscape that may offer an opportunity to improve profit margins or achieve other benefits.
The study found 48 instances of renegotiation in the 146 projects for which data was available, which roughly equates to one in every three projects. When the data was filtered by region and sector, it was interesting to note the significant prevalence of contract renegotiation in Latin America (58%) and in the transport sector (42%). In addition, the most common cause of renegotiation was found to be increased costs in construction or operations, while the most common outcome of a renegotiation was a change in tariffs. It should be noted that the timeframe for the study (projects that reached financial close between 2005 and 2015, inclusive) meant that almost all the projects are still in progress, and therefore may incur further renegotiations in the future. This suggests that the true prevalence of renegotiation is likely to be higher than was found in the study.
This chapter provides a background to renegotiation of PPP contracts in Section 4.1 (Background) and provides guidance on successfully managing renegotiation. The key elements of successful renegotiation are summarised below and detailed in Section 4.2 (Guidance).
Section 4.3 (Summary data analysis) provides a summary of the data analysis with respect to renegotiation of PPP contracts.