The following guidance outlines the key issues that should be considered when approaching renegotiation of a PPP contract.

A. Introduce policies to limit frequent renegotiations

If the private partner perceives the Procuring Authority as being excessively open to renegotiation, this may encourage opportunistic private sector bidders to make more aggressive (and potentially unrealistic) bids to secure a project, hoping to then renegotiate the PPP contract shortly after financial close in the absence of competition. As a result, the private partner may attempt to transfer risks back to the Procuring Authority that the Procuring Authority believed had been contractually allocated to the private partner. This may reward private sector partners who may not be efficient, but who are opportunistic negotiators.

The research suggests that parties sometimes seek opportunistic gains (either financial or political) through renegotiation, although this will always be a subjective interpretation and there will not typically be strong evidence to demonstrate that the drivers for renegotiation were opportunistic. It is therefore difficult to share detailed experiences, but the Procuring Authority should be alert to the possibility of opportunistic renegotiations. In a similar light, opportunistic renegotiations initiated by a Procuring Authority will also be detrimental in terms of the relationship with the Project Company but also the long-term private sector interest in a country or region.

The key issue associated with renegotiation in PPPs is that it can have the effect of retrospectively distorting the competitive tender process. Where a contract is renegotiated and the agreed risk allocation changes after the preferred bidder has been selected, it is no longer obvious that the Project Company that was awarded the project offers the most cost-effective solution. This is because the originally tendered project and the renegotiated project are in essence two different projects.

Most significantly, a project’s value for money becomes less clear in the absence of competition. Other implications of renegotiation that should be considered by the contract management team include the following:

  • Renegotiations have the potential to reduce the transparency that existed during competitive bidding, which may also be controversial in terms of public perception

  • The efficiency of the PPP model may be jeopardised by renegotiation: Renegotiations have the potential to reduce the overall economic benefits of PPP arrangements by changing the tendered and agreed risk allocation

  • If renegotiations are frequent in a country or region, the credibility of the process for utilising PPP transactions is called into question

  • From a legal perspective, competitors might also challenge such renegotiated changes on the basis of competition or procurement laws, which can also have implications for future tender processes

  • A renegotiation may highlight broader issues and set a precedent for other similar projects (e.g. if a demand risk allocation is changed to the advantage of a Project Company, other Project Companies in similar projects might demand the same changes)

A Procuring Authority will face a dilemma when the Project Company is facing financial difficulties due to the materialisation of a risk that was allocated to the Project Company under the PPP contract. On the one hand, the Procuring Authority needs to ensure it is retaining the value for money forecast at financial close. On the other hand, it has a sometimes-conflicting interest to ensure that the underlying public service continues to be provided. The potential solutions to this dilemma are detailed below under guidance C. Fully assess the appropriateness of a renegotiation.

B. While limiting frequent renegotiations, also be mindful of opportunities that may be available through renegotiation

C. Fully assess the appropriateness of a renegotiation

D. Consider termination as an alternative to renegotiation

E. Ensure adequate resourcing is employed during a renegotiation

F. Consider the transparency of the renegotiation process and ensure good record keeping practices

G. Ensure compliance with the regulatory framework in relation to a renegotiation

H. Consider the associated private partners’ roles (including the lenders’ role) in a renegotiation

I. Be aware of the broader implications of a renegotiation, including assessing opportunities for procurement of better PPP projects

Questions and Answers

View our list of previous questions and answers or submit a question to our PPP Contract Management team.