The Renegotiation of PPP
Contracts: An Overview of its
Recent Evolution in Latin America

18

Discussion Paper 2014 • 18

José Luis Guasch, Daniel Benitez,
Irene Portabales and Lincoln Flor
The World Bank,
Washington D.C., USA

The Renegotiation of PPP Contracts:
An Overview of its Recent Evolution in
Latin America1

Discussion Paper No. 2014-18
Prepared for the Roundtable on

Public-Private Partnerships for Transport Infrastructure:
Renegotiations, how to approach them, and economic
outcomes(27-28 October 2014, OECD, Paris)

José Luis GUASCH2
Daniel BENITEZ
Irene PORTABALES
Lincoln FLOR
Revised December 2014
1

Correspondent email guaschjl@gmail.com

2

José Luis Guasch, Professor of Economics, University of California and San Diego and former Head of the WorldBank Global Expert Team of PPP; Daniel Benítez, Senior Economist at the World Bank; Lincoln Flor, SeniorTransport Economist at the World Bank and Irene Portabales, Transport Operations Analyst at the World Bank.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Table of Contents
Abstract .................................................................................................................. 4
1. Introduction ...................................................................................................... 5
2. Definitions: What is Renegotiation?................................................................ 9
3. Renegotiations Typology ............................................................................... 10
4. Why Renegotiation is an Important Issue: Implications ............................... 11
Evidence ............................................................................................................................ 12

5. Evolution 2005-2013 ..................................................................................... 19
Drivers of renegotiation requests ...................................................................................... 19

6. Platform for Addressing Renegotiations and Measures Taken
to Tackle this Issue ........................................................................................ 20
7. Some Reflections ........................................................................................... 22
References ............................................................................................................ 23

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Abstract

This paper analyzes the experience, high incidence, lesson learned and reflections on the issue
renegotiations in Latin America, based in the evolution of PPP contracts through the last 25 years. The
paper also shows how countries via new PPP laws, regulations, norms and specific platforms can
reduce the incidence and the incentives to renegotiate contracts. Based in experience in the last two
decades, many countries in the region have improved renegotiation practices andregulations/framework through their PPP legislation and associated regulations, such as Peru (2008),
Chile (2010), Colombia (2011) or Mexico (2012.) The preliminary findings show advances in theimplementation of platforms to address renegotiations and new trends in the renegotiations ofcontracts particularly in complex projects and where governments are providing financial or credit
enhancement, such as sharing risk or co-financing.
Keywords: Renegotiation, PPP, Latin America, Concession Contracts, Procurement, Incomplete
Contracts, Economic Regulation, Co-Financing and Value for Money.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

1. Introduction

Over the last 25 years, more than 6,0003 public private partnerships (PPP) projects have reachedfinancial closure in developing countries, this number, the benefits secured and the trends of the PPPs
suggest that private participation in infrastructure has become a good and viable option to complement
public investments for the development of infrastructure and the provision of public services. As wellas, to support economic growth, improve quality of life and contribute to poverty reduction, and as analternative to finance infrastructure.
Number of PPP Transport Projects by Type and Region (1984-2013)
600
500
400
300
200
100
0

East Asia and Europe and Latin America Middle East
Pacific
Central Asiaand theand North
Caribbean
AfricaGreenfield project

Brownfield projectSouth Asia

Sub-SaharanAfricaFigure 1. Number of PPPtransport
projects
indeveloping countries bytype
andregion(1984-2013) Source: Own
elaboration
with
PPI
Database data

Management and lease contract

The transport sector concentrates 25% of the total PPP contracts of the developing world. Threeregions and countries lead this process: Latin America (Brazil), South Asia (India) and East Asia andPacific (China), all large emerging economies with high economic growth rates. These 3 regions
concentrate almost 90% of the PPP transport projects in the world in the last 30 years. About 78% of
the total investment commitments in projects in the transport sector in the developing world in 2013
were concentrated by Brazil and India.
By contract type, brownfield projects are predominant in transport PPP projects although the amountof these has had a fluctuating behavior associated with economic cycles, while the number ofgreenfield project has remained relatively constant the last twenty years. In general, brownfieldprojects are usually easier to implement than greenfield projects, which are more risky, complex andhave more uncertainty in particular in traffic forecasting, in this context we should expect a greater
proportion of potential contract renegotiations associated to greenfield projects. As well as, the low
number of management contract can suggest the importance of the infrastructure gap in developing
countries that has been tried to reduce mainly by a high number of build-operate-transfer (BOT) PPP
projects.
3

Consulted on the 24th of September 2014, World Bank and PPIAF, PPI Project Database (http://ppi.worldbank.org) has
data recorded from 6224 projects in 3 key sectors (transport, energy, water and sewage).

J.L. Guasch et al. — Discussion Paper 2014-18 — © OECD/ITF 2014

5

THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Figure 2. Number of PPP transport projects by type and year in developing countries
Number of PPP Transport Projects by Type and Year
120
100
80
60
40
20
0

Greenfield project

Brownfield projectManagement and lease contract

Source: Own elaboration with PPI Database data.

A big legacy and a significant concern, of PPP contracts in Latin America (LCR) along the last 25
years is a very large number of renegotiations. Overall in the transport sector the incidence of
renegotiated contracts is over 75% of the contracts. And in some countries the incidence, including
repeated renegotiations of the same project is astonishing. For example in road PPPs, Colombia
between 1993-2010 (Bitran et al., 2012 and Guasch, 2014) showed seven times the number ofrenegotiation in Chile or Peru, part of them associated to additional investments in infrastructure thatwere not included in the original PPP contract, suggesting poor project preparation studies critical toassess the real dimension/scope of the infrastructure projects, poor contract management andsignificant consented opportunism and abuse. In addition, as outcomes of the negotiation process,additional payment commitments increased the fiscal impact and reduced considerable the value formoney of the PPP project, estimate on the basis of the original contract (Bitran et al., 2012).
In this context, a poor project preparation studies by the government (scope of the project, level ofinvestment, improper and ambiguous risk allocation, minimum requirements, selection criteria and
PPP procurement procedures) and lack of effective contract monitoring can lead to potential contract
renegotiation from both parties-public and private. Political reasons to accelerate the implementationof PPP projects with limited or lack of project preparation and proper filters (for example, without
feasibility studies and proper evaluations by experts) can lead to consecutive renegotiations toaccommodate the continuity of the PPP contract and the implementation of the contract
commitments4. There is no reliable systemic data collected on PPP contract renegotiations. The mostcomplete study is Guasch (2004 and updated in 2014) where it shows that between 1980-2002, 78% of
the PPP contracts in transport infrastructure in Latin America were renegotiated with and fairly
quickly after the signature of contract (3.1 years).
4

For example, in 2005 3 PPP roads (Interoceanic 2, 3 and 4) were awarded in Peru without cost-benefit analysis. The
governments approved avoid this important step. In 2006, a third amendment was signed to allow the financial close of
the projects. As well as, in 2009 and 2010, based in the global financial crisis, the government decided to avoid or relax
the cost-benefit analysis and reduce the filters (value for money analysis was postponed during these years) and thedeadlines during PPP project preparation, for a selected group of candidate projects.

6

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Important lessons learned in PPP renegotiations in Latin American countries were accumulated andmotivated Latin American countries to introduce key changes in the PPP legislation in countries with
PPP experience (Peru, 2008 and Chile, 2010) and recently Colombia (2011) and Mexico (2012). The
new regulations set ups a freeze for renegotiations for the first three or more years, clarifies risk
allocation, compensations, rate of return, and states that any contract modification cannot alter the risk
allocation matrix etc. Renegotiations also occur in other countries with large PPP experience such as
France, USA or United Kingdom.

Table 1. Percentage of renegotiated contracts by region and sector

Region / country

Latin America andCaribbean

US

Sector% of renegotiatedcontracts

Total

68%

Electricity

41%

Transport

78%

Water

92%

Highways40%

Engel Fischer & Galetovic
2011

Highways50%

Atthias and Saussier 2007

Parking73%

Beuve et al. 2013

All sectors

55%

NAO 2001

sourceGuasch 2004 (2012)

FranceUK

Source: Estache, Antonio and Stéphane Saussier, "Public-Private Partnerships and Efficiency: A Short
Assessment", CESifo DICE Report 12 (3), 2014, 08-13.

Even under a context of renegotiation, the PPP programs have proven quite effective on average tobring about the desired benefits and reduced the infrastructure gap that most countries face. While thebenefits have been quite significant, they could have been even higher had the program and project
been better designed and implemented. There have been issues and problems most related to the postcontract award management of projects
While the ex-post contract award management of PPP projects is indeed critical for securing the
expected benefits of PPP project, it has in general not been an important priority for governments ortreated lightly or as a sort of residual to be taken care somehow. It is indeed surprising when notingthat most PPP contracts have durations of 15-30 years, or for PPP in social sector which can involve
more complexity, for example PPP in the health sector, where set up the level of services and its
monitoring is a big challenge for governments. Issues do and will come up, and often not well
specified or detailed in contract, in particular in dynamic markets where cost structure is changingaligned to the main drivers (for example, high prices of commodities) or the demands has increased
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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

over the expectations or level of services. This all creates opportunities for abuse and opportunism,
and raises the likelihood of conflicts among the two parties quite significantly. The conflicts appear at
all levels, i) Contract based, and ii) Beyond the contract through renegotiation.
To some extent, disputes and differences in interpreting the contract are to be expected, and are part ofthe business as usual-but only those contract based and not on renegotiation (contract/risk
modifications). Yet the incidence of both has been and is a concern particularly that of renegotiations.
Renegotiations on average have been by and large the critical problem facing PPP. Given its
implications on value for money and the legitimation of PPP over traditional procurement, there is aneed to be prepared and to diffuse, pre-empt and address the issue.
The PPP contract, processes and institutionalism are the key determinants along with the contractual
integrity are the focus and impinge on the likelihood of securing those benefits and avoiding conflicts.
If the key contractual clauses are not well written (or risks are not well allocated) the benefits will be
reduced and the incidence of conflicts significantly increased. If the oversight/fiscalization andregulation is not properly set up, again the benefits will be reduced and the conflicts increased. If theconflict resolution mechanisms are not predicable, transparent enough, again interest and benefits
likely decline
As is reported here a very significant number of PPP have been renegotiated shortly after the contracts
have been signed. These renegotiations occur frequently in a short period of time after financial close(or even before). The problem is especially acute in some sectors, notably transport and the supply ofwater and sanitation. Most of renegotiations are initiated by private sector operators and to a lesser
extent by the Government. Thus it is indeed critical to understand the issue, its causes and how best toaddress so as that PPP programs can generate its expected benefits. This is the challenge of this paper,
which analyzes and evaluates the renegotiations paradigm during the last 25 years.

8

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

2. Definitions: What is Renegotiation?

A renegotiation of PPP contracts involves a change in the original contractual terms and conditions, as
opposed to an adjustment in the payments (or tariffs) that takes place under a mechanism defined in
the contract. Those contractual changes as described below in Table 2.
Table 2. Definition of renegotiation and examples
Renegotiation is when:

Examplesi) a change in the risk matrix assignment and /or in the conditions of the contract, or









ii) a change in project scope (if this was not
regulated in the contract).

Renegotiation is not when:










Reduce the level of services (airports, from IATA A to B).
Defer or advance investments for several years.
Extension of the contract term.
Reduction guarantees (financial bonds)
Increase the guarantee of the government (to paylenders).
Delays in the reduction of tariffs (tolls).
Reduce the thresholds of the economic equilibrium of
the contract, etc.
Government requests new investments.
Reduction of fees for the government.
Ovoid bankruptcy of the operator.
Changes on the contract scope, etc.
Tariffs are adjusted with a formula set it in the contract
or indexed by inflation or other index.
Triggers are activated and eventual investments
become mandatory.
Payments to operator if they are regulated in thecontract, etc.
Corrections of errors in the contract, which do notcreate obligations, commitments or contingencies(typos, contradictions that affect the implementation
for the PPP contract, etc.).

Source: Own elaboration.

The challenge in “good” renegotiations is to improve the value for all parties, including users of theservices, but accounting for possible fiscal consequences of the contract modification.
Renegotiation requests are often linked to aggressive bids, which have become quite widespread. The
rational for an aggressive bid is that it is presented at the auction time, with the intention of winning
the award/the PPP contract, and then later on, away from competitive conditions renegotiate bilaterallywith the Government better terms. If there is only one valid bid, under weak institutions, theJ.L. Guasch et al. — Discussion Paper 2014-18 — © OECD/ITF 20149

THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

negotiation position of the government is quite weak, and in general will try negotiating the PPP
contract and accepting part or all of the renegotiation conditions5. An aggressive bid is defined when
the present value of revenues (R) is insufficient to cover the present value of costs including taxes anddepreciation of the PPP project, at the time of the bid and thus generates losses on the return on capital
investment:
𝑹 = (𝑷 − 𝑪)𝑸 − 𝑻 − 𝑫 < 𝒓𝑲
Where:

R: Revenues
P: Unitary price
C: Unitary cost
Q: Quantity

T: Taxes
D: DepreciationrK: Rate of Return of CAPEX

Under a legal framework without restrictions, renegotiations can occur at any time after the PPP
contract is signed. Usually the results of renegotiations are: improvement of the terms of the operator
and / or investors, reduction of efficiency, reduction of quality for users and adverse fiscal impact,
including increases in direct and contingent liabilities. Some have benefited the users, but they are avery small proportion of the renegotiated contracts

3. Renegotiations Typology

Regarding to the initiator of the renegotiation can be classified in: initiated by the government,
initiated by the operator or concessioner, by both or ambiguous. When initiated by the government, thereason usually is because of change of priorities, change of government party or that the government
cannot fulfill its contractual obligation, although politically opportunistic reasons also exist (in somecases, government wants to anticipate or expand investments , or to delay the increase or decrease
tariffs to increase popularity prior to elections, etc.). On the other hand, when initiated by the private
sector, renegotiations are due quite often to opportunistic reasons, seeking for maximizing the netpresent value of the PPP contract (more revenues, less costs or investments, or/and less risks), but also
against shocks (domestic or external) that significantly unbalance the financial equilibrium.

55

If only one valid bid was received, and the winning bidder doesn’t want to sign the contract, unless there is acommitment to renegotiate later, this behavior can be associated to an aggressive bid. If institutions are weak andcancelation for the PPP process can affect the PPP program or have political consequences, this context can incentive
more aggressive bids. Even, in the case that contract is signed or the government decides to reject the renegotiation
conditions, the contract has to be cancelled and the PPP project has to be rebid, under a new procurement process andthe political promises to develop infrastructure and deliver services will affect the credibility of the government, andthere is no guarantee of more competition under a new PPP process. In political terms, the whole PPP program can beaffected or delayed. .

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Table 3. Renegotiations classified in: initiated by the government, initiated by the operator orconcessioner, by both or ambiguous

All sectors
Water and Sanitation
Transport

Both Government and Operator

Government

Operator

13%
10%
16%

26%
24%
27%

61%
66%
57%

Source: Guasch (2004, updated 2014), Concesión y renegociar las concesiones de Infraestructuras hacerlo bien - Análisis de renegociar las concesiones en América Latina y el Caribe, mediados de la década de 1980 a 2010.

4. Why Renegotiation is an Important Issue: Implications

The concerns about the incidence of renegotiations are based in that they: Eliminate the competitive effect of the auction including transparency: questioning the credibilityof the model/program Asymmetric information and lack of negotiation skills of public sector and lack of competitive
pressures to renegotiate the contract.
 Distortion in public tender, in that the most likely winner is not the most efficient operator but themost expert/qualified in renegotiations.
 Decrease the benefits/advantages of PPP and the welfare of users, and usually it has a fiscal
impact by increasing liabilities to the government.
 While some can be efficient, many of them are opportunistic.
In the case of unsolicited bids, when there is only available bid is presented by the proponent, some
PPP legislations allow governments to negotiate the contract conditions. Even this is not a formal
renegotiation, the same challenges are present. Other PPP legal frameworks regulate a negotiation
period after the contract is awarded, where under threshold the parties will agree on specific topics.
Some renegotiations are consequence of dispute resolution decisions, where the government or theoperator has to pay the other party or when there are reductions in costs or risks. The typology of costs
associated with disputes, conflicts and renegotiations are:--Time and financial resources: to address and resolve the conflict.
Social and Political: Since conflicts tend to be highly visible and have great coverage of themedia, leading to disenchantment of citizens, the PPP model tends to lose credibility andpublic support, and the government can be weakened.
Financial/Fiscal: Often the results of the negotiation have a fiscal cost to the government.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA-

Economic and Social: Users tend to be adversely affected by the results of conflicts,
particularly renegotiations (in terms of reduced access, higher or lower prices and delays inservice quality).

On average, these costs are quantified as 3-15% of the investment, the impact and uncertainty of theresults of the conflict resolution can be quantified as adding 2-4 points%ages on capital cost of the
project.

Evidence
Overall incidence of renegotiated contracts in Latin America and the Caribbean
From 1990 to 2013 more than 1,700 PPP projects reached financial closure in Latin Americancountries, 41% of the total PPP contracts being concentrated in one country (Brazil).
As the projects become more complex usually an increase in government support is needed. In Latin
America between 2000 and 2007, an urged increase in government support for PPP projects occurred,
including transport infrastructure, followed by a sharp decline after the global financial crisis.

Figure 3. Projects with government support
Projects with Government Support in LAC
15
10
5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

EnergyTransport

Water and sewerage

Source: Own elaboration with PPI Database data.
The increase in the complexity of PPP projects might suggest more renegotiation incidence; but on theother hand, the countries with PPP experience have improved their renegotiation regulations in their
PPP legislation, which intends to reduce incentives and manage renegotiations with better structure
and oversight.
As shown in the table below the incidence of renegotiation continues to be significantly large,
averaging 68% overall and 78% in transport infrastructure, and also are done relatively quick after
contract award, about one year after (between 1980 and 2000, was 3.1 years, Guasch, 2004). The mostcommon sectors continue to be transport, water and sanitation; yet social sector PPPs are picking up.

12

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Table 4. Percentage of renegotiated PPP and average time to renegotiation

Sectors

Percentage of Renegotiated PPP

Average Time to Renegotiation

68%
41%
78%
87%
39%
35%

1.0 years
1.7 years
0.9 years
0.8 years
1.2 years
1 yearAll Sectors
Electricity
Transport
Water
Social Sectors
Other Sectors

Cancel or Renegotiate contracts. Governments with weak institutions face a crucial tradeoff between
the cancellation and renegotiation of a PPP contract to avoid, for example a potential bankruptcy. The
number of cancelled contracts in Latin America is low but increasing in the last 30 years, about 5% of
total PPP projects granted as shown in Table 5 below. This rate is slightly higher than the average fordeveloping countries (4.3%)6 . When it is contrasted with the number of renegotiated contracts, itstrongly hints to the difficulty of governments to commit to a policy of no renegotiations and assume
the political consequences of cancelations of PPP projects. One would expect that number to besignificantly large, particularly at the begging of programs, where the Governments could signal byrejecting the request, to a credible policy of no renegotiations. Yet governments when confronted torenegotiations can have the option to deny the request and leave the decision to abandon or not theconcession to the private operator. Yet that seldom happen, and for a number of reasons that we detailbelow, governments find it easier to allow the renegotiation of contracts (Harris and Pratat, 2009). And
that leads to a vicious circle, since private operator understand the difficulties of government tomanage the PPP program, their inability to cancel contracts, to reject renegotiations requests and thepolitical consequences.
Table 5. PPP contracts cancelled 1984-2013 in LCR (no divestitures)
Infrastructure LCR:
Total Number of PPP Projects

Cancelled

1713
By sector
Transport
EnergyWater and Sanitation
Telecom

Percentage of Projects

85
By sector

4.96 %
By sector

39
19
22
5

7.01%
2.46%
8.56%
3.91%

Source: Own elaboration with PPI Database data.

6

For the same period, low-income countries show a PPP cancellation rate of 7.16%.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Specific examples in Latin America: Renegotiations in Chile, Colombia and Peru
Here we show the evidence of renegotiations in three Latin American countries, Chile, Colombia andPeru for the period 1993 to 2010. It shows a significant incidence of renegotiations of PPP roadcontracts, a significant incidence of renegotiations of the same contract, and substantial fiscal costs of
the outcomes of renegotiations. Colombia shows an important fiscal impact, in particular between
2005 and 2006.
Table 6. Summary of sample statistics by country, 1993-2010

Total road concessions
Mean initial value of contract (constant USD Dec 2009, million)
Mean initial term (years)
Mean concession length (km)Mean concession years elapsed
Renegotiated road concessions
Total number of renegotiations
Mean number of renegotiations per concession
Mean time of first renegotiation (years)
Mean fiscal cost of renegotiations (constant USD Dec 2009,
million)*Mean fiscal costs / initial value (percentage)
Mean added term (years)
Mean added length (km)Number of renegotiations / concessions year elapsed
Source: Bitran et al 2012.
*Over the life of the contracts, across all renegotiations.

Chile

Colombia

Peru

21
246
25.2
114
12.5
18
60
3.3
2.7
54.8

25
263
16.7
195
9.0
21
403
19.21.0
262.5

15
166
22.1
383
4.6
11
44
4.6
1.4
28.9

20.3
0.9
0
0.2

278.5
6.3
54.6
1.8

13.4
0.8
0
0.9

Figure 4. Number of concession renegotiations per year in each country

Source: Bitran et al 2012.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

The trends on PPP road contract renegotiations in Chile, Colombia and Peru shows (see Table 7) theleadership of the government motivating renegotiations, most of them during the construction stage
that suggest poor project preparation on the scope and conditions of the infrastructure and with
important fiscal costs.

Table 7. Characteristics of contract changes, 1993-2010
Chile
Total
How

Bilateral Agreement
Arbitration
Government-led
Firm-led
Jointly-led
When
During construction
After construction
What for
Complementary works
Change conditions
Both
Add new stretches
Paid when
Present fiscal transfer
Deferred fiscal funds
Other costs realizedlater
No costTypes of cost
Fiscal transfer
Increase concession
termHigher toll tariffs
Other type of payment
Without direct cost
Source: Bitran et al 2012.

Colombia

Peru

60
83%
17%
84%
12%
4%
53%
47%
69%
22%
9%
0%
66%
55%
36%

403
98%
2%
40%
20%
40%
51%
49%
39%
55%
1%
5%
42%
6%
28%

100%
0%
64%
23%
13%
62%
38%
17%
83%
0%
0%
14%
0%
39%

14%
66%
12%

24%
48%
12%

47%
20%
14%

24%
16%
15%

1%
0%
45%

0%
0%
77%

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Figure 5. Additional cost versus initial contract value (%)

Source: Bitran et al 2012.

Figure 6. The fiscal costs of renegotiations in Chile and Colombia(Constant prices in millions USD, December 2009)

Source: Bitran et al 2012.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Other cases outside the region
That high incidence of renegotiations is not privy to the LAC Region. It also happened outside theRegion, cases in point are the experiences of India, Portugal and Korea7, among others.
i)India Renegotiations

India launched in the lid to late 2000s an aggressive program of PPP particularly in the road sector,
awarding over 300 highways PPP. Many of them with the support of the Viability Gap Fund, often
awarded under the criteria of minimum subsidy requested. As of 2014, more than half of those projects
are in distress with the private operators requesting renegotiation of the contract. Apparently, asignificant number of those renegotiations demands originate from aggressive bids. The Governmentof India has been evaluating the situation and prepared a response for this systemic problem, but in a
selective and case by case basis. Overall its approach has been to reject most of the request.
ii)

Portugal Renegotiations Case Study8“Troika” agreement – PPP reforms implemented, 2011-2012
All PPP projects to be developed were paralyzed, affecting several sectors during 2011-2012. The
Ministry of Finance (MoF) and the International Monetary Fund assessed the PPP legal andinstitutional framework in a new PPP framework law and UTAP created (June 2012). MoF updated
and enhanced its reporting instruments on PPP and concessions. Ernst & Young was hired for theassessment of the PPP renegotiations.

7

In Korea, there are currently over 168 projects (in the construction or operation phase) which have beenrenegotiated (Source: KDI PIMAC, 2012).

8

Source: Unidade Técnica de Acompanhamento de Projetos (UTAP), 2014.

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

Table 8. Portugal renegotiations case study
Strategic position of theStates message toprivate partners







January 2013, formal
launch of negotiations
to 1.05

The road model is not sustainable for the public partners (EP) party.
Renegotiation will provide more rational contracts and remuneration
schemes.
Overall reduction of public payments through reduction in IRR, CAPEX andOPEX
No debt renegotiation is undertaken: any debt renegotiation would
increase financial costs of contracts.
Financial institution would increase financial costs of: only transitory ADSCR
reduction from 1.25 to 1.05.

Renegotiations of 16 contracts in order to reduce State gross payments. The
main strategic lines: Paralyzing investments in course and reduction of contract scope(sub concessions) Rationalization of engineering standards according tointernational/EU standards
 Suppression of automatic payments for future CAPEX Reduction of the shareholder’s IRR
Additionally, toll revenue related measures.

Negotiation outcome
measures IR

Target for 2013: 300 million (IRRCAPEX).
Overarching negotiation objective: reach sustained savings throughout the
projects standards
7 preliminary agreements reached throughout 2013:
 2,5 Billion euros, contract life cycle forecast 231 Million EUR in 2013
Amended contracts did not entry into force in 2013, pending financial
institutions and Court of Auditors approval.

Negotiation outcome
institutions and Court of
Auditors a

Forecasted savings of 6.600 million euros (-22%):
 State concessions (9) = 2.800 Million euros (-17%)
 EP subconcessions (7) = 3.800 Million euros (-25%)
Negotiation status (September 2014):
 5 contracts approved by financial institutions
 6 agreements pending financial institutions approval 5 contracts still under negotiation
Once approved, contracts are to be send to Court of Auditors

Source: Own elaboration.

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5. Evolution 2005-2013

Overall indicators show as of 2013 an increase in the average of renegotiations relative of the levels in
2004, a significant increase on average in the number of renegotiations per concession/PPP and adecrease in the incidence of renegotiation in selected countries that have implemented measures toaddress the issue.

Drivers of renegotiation requests
The renegotiations requests can have multiple causes, external and/or internal. Some examples
associated mainly with external drivers are: i) significant changes in economic circumstances. In
regulated markets where no prices can be adjusted unilaterally by the private operator, frequently leadto renegotiation requests, either by the operator or the Government (even if the risk allocation isestablished in the contract); ii) Occasionally, economic conditions change unexpectedly because of themacroeconomic conditions beyond of the control of the parties (e.g. financial crises worldwide, thefluctuations of currencies) break the bankability of the project and induce renegotiations requests; iii)
Unforeseen natural events or disasters that require emergency interventions or investment.
Among the most common internal drivers for demands for renegotiation are: i) elections where the
new administration can change the regulation and contract terms and affect the operator rights, etc.;ii) new demands of users over the original level of services (in particular in the first generation forroads and airports); iii) bidding errors, aggressive offers, and poorly written contracts and ambiguous
risk allocation; iv) breach of contractual obligation by government (land expropriations process cantake long time and not be available on time), lack of bankability of the project (misperceived risks)and lack of preparation studies (that increase construction risk); v) opportunistic behavior by operatorsand governments (governments may decide to modify the contract in benefit of users acting
unilaterally to capture electoral votes, or newly elected government changing priorities to modify or
expand investments after elections); vi) the opportunity of governments to bypass the fiscal controls
to secure additional financing and avoid authorization (by parliament) for additional investments;vii) the inability of Governments to credibly commit to a policy of no renegotiations leads to the abuseof renegotiation requests; and viii) the operator’s perceived leverage to influence the host government
to grant them additional benefits through the renegotiation and weak contract monitoring.

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6. Platform for Addressing Renegotiations and Measures
Taken to Tackle this Issue

A number of countries have taken measures to address the issue with mixed success, mainly as theresult of not implementing a coherent and comprehensive renegotiation platform along the lines shown
below.
Here are some of the normative measures implemented by some countries.
Table 9. Measures taken in some countries to address the renegotiations issue
Mexico

New Law and Regulations and Procedures

PeruReview to the Law and Regulations

Chile

New Law and Regulations and Conflict Resolution Framework

Colombia

New Law and Regulations and Institutionality and Process

Portugal

Platform for renegotiations

India

Normative package to guide the renegotiation process

Source: Own elaboration.

Addressing renegotiations in Latin America (and elsewhere) will continue being a big challenge wherea solid legal and institutional structure can help to mitigate requests and regulate better the
renegotiation process, but more specific measures are needed. Countries ought to adopt a
Renegotiation Platform. Elements of that platform are the following and some of them have alreadybeen adopted by some countries as indicated below:








20

The contract should stipulate the renegotiations approach, criteria and process.
Increase the political costs of accepting renegotiations demands, by implementing a
Transparency Framework-Use of Web, publish the requests, decisions and arguments, andusing the media to inform on request and decisions and rational.
Establish a reputation of not being well disposed to renegotiate by cancelling PPP/concessions
processes particularly from request driven by aggressive bids
Use and implementation of "delivery unit" to high level to resolve impasses in the preparationof projects/contracts.
Use and implementation of requirements of resolution/problem unit (licenses, permits, rightsof-way, evaluations specific-environmental archaeological etc.)
Establish a freeze period for renegotiations; say no renegotiations will be considered for three
to five year after contract award. Only few exceptions can be accepted (Peru and Colombia).
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






















Establish clear jurisdiction over the decision to renegotiate, at high level, such as
Interministerial Committee lead by Minister of Finance (Chile and Peru).
Establish in the contract the right to evaluate and reject aggressive and reckless bids, defining
the criteria and standards, including submission of financial model for those bids or additional
guarantees (financial bonds).
Establish transparent framework of conflict resolution (panel of experts and arbitration). Using
proper panels of experts (which composition based on technical profile and selected at random
from pool of experts) to address issues such as aggressive bidding, renegotiation requests,
arbitration, regulation-resetting tariff structure.
Establishing a matrix of risks with detailed risks identification and allocation-establishing thatmodifications of the contract must not alter the risk allocation. A statement in the law or
regulations that the risk matrix cannot be altered (Mexico).
Establish that if the contract is modified, the net present value of the modifications must be
zero, and preserve value for money
Impose appropriate (biting) level of performance bonds: for example, at least 15% of theinvestment (Uruguay)
Clarification and wording of key contractual clauses and biding documents.
Putting in place a platform for efficient land expropriation and for the securing of rights ofway (Mexico and Chile).
Structure financial support by government (certain and contingent) over time, not all at the
beginning (i.e. viability gap funding)Establish guidelines for levels of compensation.
Symmetry on effects and compensation of unilateral actions taken by government
Request a mandatory bidding process for additional infrastructure request (either bygovernment or by operator) and the interest rate for PPP financing (Chile)
Use appropriately the selection of competitive factors (such as the award criteria) to increase
the costs – make more expensive the exit. When possible use as award criteria (for some
sectors) the least present value of revenue, as it is quite robust to mitigate renegotiation
requests (automatically extending the duration of the contract if economic conditions become
adverse, Chile and Colombia).
Greater role of the regulator and PPP Unit in the design of contract and regulation of thecontract (Peru, Colombia).
Disuse of clause of financial equilibrium (Chile and Peru).
Platforms of renegotiations and process led by the Ministry of Finance (Chile and Peru).
Use of regulatory accounting (Peru and Chile).
Transparency of the renegotiation process. Disclosure of information since the request,
analysis, negotiations and final amendment- web information. Greater use of LPVR as theaward criteria to mitigate demand risk (Chile and Colombia).

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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICA

7. Some Reflections

Finally, some reflections about the issue of renegotiations of PPPs. There are indeed valid reasons torenegotiate PPP contracts and some incidence is to be expected as a result of a number of things, suchas incompleteness of the contract, the long duration of the contract/project, the likelihood of
unforeseen events with significant economic/financial impact, the likelihood of changes in priorities
by conceding governments and so on. Yet the observed high incidence of renegotiations is a serious
concern, a source for criticism and for the questioning of the effectiveness of PPP programs. It
indicates an abuse of the instrument and its use for opportunistic reasons rather form well founded
contractual ones. The benefits of PPP programs have been extensively proven over the 25 years of
PPP experience in Latin America (Guasch 2004, 2012). Yet to sustain the programs and to secure theexpected benefits, the issue of renegotiations (which outcomes generically reduce the originalcontracted for benefits) needs to be addressed and is the major weakness of PPP programs.
As presented here the key principles to guide country initiatives to address renegotiations are as
follows. When government are confronted with requests for renegotiation, the sacred character of theoriginal contract/bid must be respected to preserve the value for money of the original contract, andthe contractual or bid offer must not be breached. The operator should be held responsible for its offer
and risks accepted in the contract. The financial equation of the winning offer should always be thereference point, and if the contract is to be modified, the outcome should have an impact of zero netpresent value of the benefits, and the contract modifications should not change the original risk
allocation matrix. Renegotiation must not be used to correct errors in the bid or excessively risky oraggressive bids.

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References

Bitran Eduardo & Villena Marcelo (2012) Benefits and Costs in Public Private Partnership: Transport
Infrastructure Projects in Latin America. Facultad de Ingeniería y Ciencias, Universidad Adolfo
Ibáñez.
Bitran E., Nieto-Parra S. and Robledo J. (2012) “Opening the black box of contract renegotiations:
An analysis of road concessions in Chile, Colombia and Peru” Draft Renegotiations in Chile,
Peru and Colombia, Mimeo.
Guasch, J. L., J.J. Laffont and S. Straub (2007) “Concessions of Infrastructure in Latin America:
Government-led Renegotiation”, Journal of Applied Econometrics 22, p 1267-1264.
Guasch, J. L., J.J. Laffont and S. Straub (2006) “Renegotiation of Concession Contracts: A theoretical
approach”, Review of Industrial Organization 29: 55-73
Guasch J.L., J-J Laffont and S. Straub (2005) Infrastructure concessions in Latin America:
government-led renegotiations, World Bank Policy research Working Paper 3749.
Guasch, J.L. (2004) “Granting and Renegotiating Concession Contracts: Doing it right”, World Bank
Publications
Guasch, J. L., J.J. Laffont and S. Straub (2003) “Renegotiation of Concession Contracts in Latin
America”, Policy Research Working Paper 3011, The World Bank, April.
Harris, Clive, John Hodges, Michael Schur, and Padmesh Shukla (2003) Project Infrastructure areview of Canceled Private Projects., World Bank, Note Number 252.
Harris, Clive and Pratap Kumar (2009), What drives private sector exit from infrastructure? Gridlines.
Note 46. PPIAF.
Huamaní Sandro and Vargas Tito (2011) Renegociaciones no eficientes a partir del diseño del contrato
y la licitación en las concesiones en transporte. Revista de Regulación en Infraestructura deTransporte. Number 7.OSITRAN.
Laffont Jean-Jacques and Tirole Jean (1993) “A theory of Incentives in Procurement and Regulation”,
The MIT Press, Cambridge
Mc Affee Preston and John Mc Millan (1986) “Bidding for Contracts: A Principal Agent Analysis”,
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Montesinos Jorge and Saavedra Eduardo (2011) Algunos alcances en torno a la institucionalidad yrenegociación de concesiones en la infraestructura de transporte de uso público en Perú, Revista
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THE RENEGOTIATION OF PPP CONTRACTS: AN OVERVIEW OF ITS RECENT EVOLUTION IN LATIN AMERICAOECD Development Center (2012). “Latin American Economic Outlook”. Paris: OECD Development
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Tirole, Jean (2007) “Bounded rationality and incomplete contracts”, May (accessed at
http://citeseerx.ist.psu.edu on October 6, 2012).
UTAP, (2014), Renegotiations of PPP Concessions in Portugal, Power Point Presentation.

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Figures and Tables
Figure 1. Number of PPP transport projects in developing countries by type and region (1984-2013)
Figure 2. Number of PPP transport projects by type and year in developing countries
Table 1. Percentage of renegotiated contracts by region and sector
Table 2. Definition of renegotiation and examples
Table 3. Renegotiations classified in: initiated by the government, initiated by the operator orconcessioner, by both or ambiguous
Figure 3. Projects with government support
Table 4. Percentage of renegotiated PPP and average time to renegotiation
Table 5. PPP contracts cancelled 1984-2013 in LCR (no divestitures)
Table 6. Summary of sample statistics by country, 1993-2010
Figure 4. Number of concession renegotiations per year in each country
Table 7. Characteristics of contract changes, 1993-2010
Figure 5. Additional cost versus initial contract value (%)
Figure 6. The fiscal costs of renegotiations in Chile and Colombia (Constant prices in million USD
December 2009)
Table 8. Portugal renegotiations case study
Table 9. Measures that have been taken in some countries to address the renegotiations issue.

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