This section provides a summary of the renegotiation data analysis. The full data analysis is available in Appendix A (Data analysis).
The study found 48 examples of renegotiation, out of the 146 projects for which data was available, which is an incidence of 33%. It should be noted that the prevalence of renegotiation results is heavily influenced by the timeframe that was selected for the research (i.e. projects that reached financial close between 2005 and 2015, inclusive). While all projects in the sample have been running for at least two years, this reduces for each subsequent year, and only 50 projects have been in progress for more than eight years. The influence of this is that, while only 33% of projects in the entire sample experienced renegotiation, the data indicates that almost 20% of the ongoing PPPs had experienced renegotiation by their fourth year after financial close, and 45% of PPPs by their tenth year after financial close. This suggests that the true prevalence of renegotiation is higher than was found in the study, due to the timescales involved.
There are several other interesting findings from the data collection on renegotiations that relate to prevalence of renegotiations in particular regions, particular sectors and at particular times after financial close.
As demonstrated in Appendix A (Data analysis), the transport sector has the highest incidence of renegotiations overall, with 42% of transport projects renegotiated compared to 33% of projects overall.
As also demonstrated in Appendix A (Data analysis), the average period of time after financial close for renegotiation to occur was 3.6 years. Where the renegotiation occurred during the construction phase, it occurred on average 2.5 years after financial close. Where it occurred during the operations phase, it was on average 5.0 years after financial close. For the reasons noted above in relation to the timescales involved, this average period may change for projects as they reach full contract duration. Large numbers of renegotiations took place between two and four years after financial close, with 7% of the 146 projects studied being renegotiated in the third year after financial close.
Table sets out the prevalence of renegotiations in different regions based on data collected on all projects at all stages after financial close. It should be noted that, for the regions with less data available, only a small number of projects were investigated. The percentage prevalence for the regional information is therefore not statistically significant.
*Note: It is understood that the prevalence of renegotiation in Latin America is due in part to the Brazilian government unilaterally changing electricity tariffs in 2012, which led to many renegotiations on energy projects and hence has skewed these results. Affected Brazilian power projects make up 11% of the projects in Latin America, and 3% of the total sample data.
Typical causes of renegotiation and typical outcomes, including a detailed analysis of some of those causes and outcomes are detailed below.
Figure 1 depicts the causes of renegotiations recorded on the 48 PPPs globally where renegotiation occurred. This section analyses the causes of renegotiation, including commentary on which party is most likely to commence renegotiation for specific issues.
The causes of renegotiation in the study were varied, with the most common cause being increased costs. In 17 projects the renegotiation was due to increased costs (12 during design and construction and five during the operations phase), while another nine were due to a change in regulation or policy change. A further nine were due to modification of the payment mechanisms and/or a change in tariff. Five were due to incorrect demand forecasts, including in the Queen Alia International Airport Expansion Case Study, where the actual volumes were higher than predicted. Another common cause was delays to interface projects, such as a high speed rail link which relied on the construction of an adjoining high speed rail project, which was delayed.
Renegotiation in the energy sector was mostly caused by a change in tariff, while the causes in the transport sector covered all of those described above.
The party initiating the renegotiation was split evenly between the Project Company and the Procuring Authority. This was the case both overall, and within Europe and Latin America (the two regions with significant numbers of renegotiations).
The study confirmed that the Project Company often initiates a renegotiation when it is facing financial difficulty or potential insolvency. The main causes of this financial stress were increased construction costs (though increased design or operating costs also played a role) and incorrect demand forecasts.
Factors that may affect costs and revenues and lead to renegotiation include aggressive bidding, and a lack of preparatory studies which increases construction risk. They may also be related to weak contract monitoring, or the Project Company’s perceived leverage to influence the Procuring Authority to grant them additional benefits through a renegotiation.
The study showed that the main causes of a Procuring Authority initiating a renegotiation include a change in tariff or payment mechanism, followed by government policy changes and changes in scope. Internal drivers from the government include elections, where the new administration changes the underlying policies around PPPs, or changes in user demands over the level of service or the price of the service leading to public unrest. A road project in Latin America (not covered in detail in the study) experienced the latter situation, where public objection of the toll rates meant the Procuring Authority had to renegotiate the PPP contract to adjust for a lower available toll rate.
Renegotiation can be brought about by external drivers such as significant changes in economic circumstances, including macro-economic conditions beyond the control of the parties, or unforeseen natural events or disasters. Renegotiation instigated by the Procuring Authority for several highway PPPs took place in the Republic of Korea (also not covered in detail in the study) to share the benefits of refinancing.
Both parties are likely to resort to renegotiation in the case of poorly written contracts and ambiguous risk allocation.
Although both parties can have reasonable and legitimate reasons to initiate a renegotiation due to any of these reasons, they also sometimes seek an opportunistic gain through renegotiation. This issue is detailed in Section 4.2 (Guidance).
Example – Highways in India
Stakeholders interviewed as part of the research on highway PPPs in India highlighted a high risk of renegotiation. This is often adopted as a solution to disputes about increased construction costs due to a failure to secure right of way and land acquisition on time, or due to utilities diversion.
The most common outcome of renegotiation in the study was a change in tariffs. There were 13 examples of increased tariffs, mainly across projects in Europe and Latin America. There were another 10 examples of reduced tariffs. The outcome of a renegotiation in Portugal resulted in the payment mechanism being changed entirely.
Another common result of renegotiation was a change in construction scope or contract duration. A change in scope because of renegotiation occurred 10 times in the construction phase out of the 146 PPPs for which the relevant data was available globally, and six times in the operations phase. This pattern was particularly common in Latin America, where scope change occurred eight times in total of the 43 PPPs for which the relevant data was available.
The construction scope changes ranged from reductions in scope on the Baixo Highway project in Portugal, to changes in tunnelling works due to ground conditions on two projects in Brazil and the Netherlands, and a large increase in investment in the Queen Alia International Airport Expansion Case Study in Jordan.
Several renegotiations took place in relation to the Sao Paulo Metro Line 4 project in Brazil to address construction delays. The construction phase was extended as a result; however, after ongoing issues, the project was eventually terminated and retendered.