The rise of public–private partnerships (PPPs) since the 1990s has helped mobilize more private capital for public infrastructure and services in Asia and the Pacific. However, along with the increase in PPPs has come an increase in contract renegotiations and terminations.
Renegotiation refers to updating or reworking existing contractual provisions. PPPs are long-term contracts, which is why renegotiation is sometimes necessary because costs, policies, and other circumstances change over time. However, this presents a unique risk to the development, implementation, and financing of infrastructure projects as this is susceptible to misuse especially for corrupt purposes. This can also affect the transparency in public procurement.
A prudent approach and a clear framework are needed to protect the interest of the parties involved and the credibility and efficiency of PPP projects.
Achieving the benefits of PPPs in terms of timely and efficient construction and service delivery depends on the quality of project preparation, structuring, procurement, and implementation. However, the incomplete nature of contracts over the long term means that even well-prepared projects may result in renegotiations due to changes in legal, technical, and commercial factors over time. Parties resort to renegotiations to save the project when contract termination would be politically imprudent for the government or may subject the private contractor to negative public perception.
A Global Infrastructure Hub study in 2018 showed that almost a third of PPP infrastructure projects globally were subject to renegotiation. Latin America had the highest rate (58%), and transport was the most affected sector (42%). East Asia and Southeast Asia had the least renegotiation events compared with other regions with 12% and 13%. The study also identified increased construction costs (21%), government policy changes (19%), and changes in tariffs or tariff regulations (16%) as the most common reasons for renegotiation.
Unforeseen circumstances can also affect project implementation and require renegotiation. A case in point is how the coronavirus disease (COVID-19) pandemic is affecting PPP projects in all stages of the development life cycle. The Asian Development Bank (ADB) has released a guidance note, COVID-19 and Public Private Partnerships in the Asia and the Pacific, which presents governance practices that help to mitigate the risks and outlines important considerations for managing PPP projects in a rapidly changing and uncertain situation.
The main problem with renegotiating a contract is that this may reduce the overall economic benefits of PPP arrangements by changing the tendered and agreed risk allocation, construction timeline, and revenue projections. The originally tendered project during competitive bidding might differ materially from the renegotiated project. It puts into question transparency in public procurement. Bidders of the project may challenge the renegotiated contract in court.
There is also the risk of “opportunistic renegotiation” or the misuse of the renegotiation process for corrupt purposes. Governments are often under political pressure to deliver on the promised infrastructure. Following the award of a contract, renegotiations may put power into the hands of the concessionaire and enhance the pressure on the government to continue implementing the project or risk its termination. The concessionaire can take advantage of its strengthened negotiating position outside the original procurement process and impose higher pricing (i.e., monopolistic pricing). An off-balance sheet PPP transaction will exacerbate the pricing power of the private partner especially if there is no public oversight.
When the parties do not reach an agreement to renegotiate the PPP, and a termination occurs, the government often needs to fully compensate the private partners for the debt and foregone earnings from the failed project. The government can decide to form another PPP to implement the project, implement the project on its own, or not implement the project at all. These adjustments are costly. In South Asia, 8% of PPPs result in early termination before the contracts expire. While the rate may not seem high, it has significant economic impact on the stakeholders, including the private sector, the community beneficiaries, and state-owned banks.
Governments should maintain a prudent approach to renegotiations. It is critical to develop standard PPP contracts that include robust contractual provisions that can address and manage project variations and changes (e.g., force majeure, material adverse government actions, changes in law, and dispute resolution mechanism) and their corresponding cost implications.
A good PPP contract limits the use of extra-contractual renegotiations or at least minimizes the process for good faith attempts to salvage a project that is not commercially or technically viable for reasons outside the control of the government and the private partners. The effective use of adjustment mechanisms within a contract can avoid opportunistic renegotiations.
A framework for regulating renegotiations should encompass at a minimum the following:
- There should be a competitive tender for additional works not addressed under the PPP agreement scope change provisions.
- Full justification, especially for cost change, should be approved by a government authority (other than the procuring authority) and be made public.
- Renegotiations should be banned during the first few years of a contract if institutional frameworks are not well-established or if renegotiation is a persistent problem.
- Independent monitors should be involved. The procuring authority should not be able to unilaterally renegotiate a PPP contract.
- Quality project preparation, structuring, procuring, and contract management should be prioritized to reduce or mitigate the need for renegotiations.
Chile, for example, sought to reduce the frequency with which it was experiencing PPP renegotiations. To address this issue, the government adopted a framework to govern renegotiations. If there are additional costs to the government following contract signing, the Ministry of Finance must approve the amended contract. The Ministry of Public Works (where the concession unit is located) must be able to justify the changes in a public report. If the price increase exceeds 5% of the approved capital works, an open and competitive tender for the new works must be conducted to avoid monopolistic pricing by the contractor. The framework also created an independent technical panel that reviews and authorizes renegotiations. These reforms significantly reduce the frequency of PPP renegotiations.
Asian Development Bank (ADB). 2022. A Governance Approach for Managing Public–Private Partnership Renegotiation. Manila.
ADB. 2021. COVID-19 and Public–Private Partnerships in Asia and the Pacific: Guidance Note. Manila.
ADB. Governance and Public Management.
Global Infrastructure Hub. Global Infrastructure Hub Update - June 2018.