Definition of renegotiation

A renegotiation of a PPP contract involves a change to the original contract terms and conditions. This is distinct from an adjustment (such as a minor scope change), which is contemplated in the PPP contract.

The scale of the change determines whether a renegotiation of the contract will be required. Large changes with major cost implications and the potential to change the agreed risk profile often require a renegotiation. For example, a renegotiation may be required where major changes to the scope of the project are involved.

PPP contracts typically include several mechanisms, such as scope change provisions for minor scope changes and claims procedures, to manage circumstances that were not fully understood or envisaged at financial close, without the need for a renegotiation. Minor changes will generally fall under the scope change or variation provisions, rebalancing provisions or other similar provisions in the PPP contract. Claims and scope changes are detailed in Section 3.5 (Claims).

Simple correction of errors or clarification of contract drafting can also typically be dealt with under existing provisions in the PPP contract and do not require renegotiation.

Some jurisdictions have a concept of economic rebalancing, which allows changes to be made that in other jurisdictions would require a renegotiation. This concept is described in more detail below under the heading ‘Economic rebalancing’.

Typical processes

The approach to renegotiation depends on the regulatory framework of each jurisdiction, which can prescribe how renegotiation can or should be carried out. It may also depend on the process agreed in the PPP contract.

PPP contracts can set out a renegotiation clause which will typically specify under what conditions the renegotiation can be initiated and what the process will be. For a renegotiation initiated by the Project Company, this process might include a requirement for the Project Company to submit a request along with an explanatory memorandum as to why it is requesting a renegotiation. The explanatory memorandum should set out the detailed background to the renegotiation request, together with all relevant legal and/or contractual justifications that validate the need for the renegotiation. The process may include time limits to mitigate the risk of delay in effectively implementing the renegotiation.

However, it should be noted that parties can also renegotiate at any stage without an explicit procedure, as long as the amendment to the PPP contract has the agreement of all relevant parties.

It is common in civil law jurisdictions for the Procuring Authority to have the power to make unilateral changes to the PPP contract. This unilateral power will typically also attach the condition that the Procuring Authority will fairly compensate the Project Company for making such unilateral amendments. For this reason, the approach in these jurisdictions will not differ greatly for renegotiations, as the parties should still negotiate the amendments and the compensation payable.

Economic rebalancing

Economic rebalancing refers to the practice of modifying the financial conditions (i.e. ‘economic equilibrium’) that were agreed as part of the original contract, with the intention of preserving or restoring the original economic equilibrium of the PPP contract. This can occur after a risk borne by either party has materialised and has been determined to have economic consequences for a party. For example, a force majeure event, a scope change, change in macro-economic conditions, change in law, or a major change to demand.

Rebalancing principles and provisions are specific to particular civil law jurisdictions (e.g. several countries in Latin America) and differ from the provisions of a typical common law PPP contract. In common law jurisdictions, events such as scope changes and changes in law are typically managed under specific scope change provisions and claims procedures, which are detailed in Section 3.5 (Claims). Rebalancing regimes, when compared to comparable provisions in common law jurisdictions, are more fluid mechanisms to deal with a variety of issues.

Rebalancing may also be available after an opportunity has materialised in favour of the Procuring Authority. For example, if the construction of an adjoining bypass increases demand and therefore toll revenue on a PPP road project, the PPP contract could be rebalanced in favour of the Procuring Authority with reduced tariffs or a reduction to the contract period.

Rebalancing may also be required because of a contract renegotiation. For example, if the Procuring Authority requested a significant increase to the scope of the project and this was agreed to by the Project Company through a renegotiation. Rebalancing may then be needed to restore the economic equilibrium of the PPP contract.

Example - A perspective from Germany

In Germany, it is not common for a Procuring Authority to be successful in demanding a rebalancing, unless this option - and a procedure for achieving it - are already set out in the contract.

In general, rebalancing can be implemented through a broad range of mechanisms. For example, Project Company compensation, change in tariff rates, change in contract duration or a change in future investments payable by the Project Company. A combination of these and other economic/financial measures may also be available.

A typical process involves the Procuring Authority calculating the economic and financial rebalancing it considers is required and presenting it to the Project Company with a proposed approach to effect it. If the Project Company is not satisfied with the proposed rebalancing, it has a right of appeal against the Procuring Authority through administrative rights or it can trigger arbitration or court proceedings to receive a final determination.

For the purpose of the data analysis explored in this chapter, the study results do not differentiate between renegotiation and rebalancing.