OECD International Transport Forum Roundtable:
Public-Private Partnerships for Transport Infrastructure“Renegotiations - How to approach them and economic outcomes”,
George Mason University, Washington DC, USA, 27 October 2014

Introduction from the Chair - Michael Burnett
learning and development - consultancy - research© EIPA 2014

Introduction – Michael Burnett
 Chartered Accountant (c.20 years working in public
procurement/PPP/contract management) Assistant Director, KPMG (7 years)
 Director, EIPA European PPP Forum (9+ years) Member, European Commission Stakeholder Expert Group on
Public Procurement since 2012
 Member, Editorial Board, European Procurement and PPP Law
Review since 2007

 Member, OECD Senior PPP Officials Group since 2012

© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – Fundamental
propositions
 The core objective of an awarding authority in awarding a PPP
contract is to secure value for money (VFM) for the public sector,
irrespective of how the economic operator is remunerated
 VFM - “The optimum combination of whole-life cost and quality(or fitness for purpose) to meet the user’s requirement”

 The awarding authority has a potential weakness after awarding a
PPP contract to a partner which de facto often has a supply
monopoly This weakness is exacerbated where the awarding authority does
not have an effective exit strategy or there is a high degree ofshort-term criticality to service continuation
 The approach to renegotiation of a given project is influenced by
the territorial/sectoral market of the project i.e. there are particularrisks in different territories, the transport sector as a sector andits sub-sectors© EIPA 2014 - www.eipa.eu

PPP contract renegotiation and VFM
 VFM in PPP award – Extensive experience and elements of goodpractice well understood“The awarding authority’s approach to the use of PPP will be
influenced by the signals at territorial level (e.g. funding incentives,preference for “deals not rules” etc.)”

 VFM in PPP execution – Still a relatively neglected subject inpractice – in spite of availability of extensive guidance (e.g.
OECD, EPEC, UK government, UK NAO reports, UK Parliament
reports, Australian states of Queensland and Victoria etc.)“VFM in a PPP is not just the VFM secured in the award procedure –it is the VFM secured in the contract execution phase”© EIPA 2014 - www.eipa.eu

PPP contract renegotiation in the context of PPP
contract management (1) Contract renegotiation takes place in the context of the awarding
authority’s approach to PPP contract management, including
measuring contract performance and checking delivery ofcontract objectives as well as managing contract change Effective contract management starts with the design of thecontract management régime during the contract award process
 The signals sent by the awarding authority before and during theaward process will influence how it is able to manage the contract(e.g. approach to project selection, approach to the PSC,
approach to stimulating competition, appropriateness oftimetable, competence in negotiation, process transparency,
stakeholder consultation etc.)© EIPA 2014 - www.eipa.eu

PPP contract renegotiation in the context of PPP
contract management (2) How the awarding authority addresses the “asymmetry ofinformation” between the public and private sectors will influence
how it can manage the contract (e.g. contract conditions giving it
access to operational and financial systems of the economicoperator, a mechanism to verify continuing VFM during contract
execution such as rate of return monitoring etc.)

 How the awarding authority addresses the “asymmetry of skills”
between the public and private sectors will influence how it canmanage the contract (e.g. transferring procurement knowledge tocontract management team, resources, skills, authority,
remuneration of the contract management function, continuity incontract management function, senior management/politicians
engagement post-award etc.)“If an awarding authority doesn’t take contract management
seriously it is unlikely to manage contract renegotiation effectively”© EIPA 2014 - www.eipa.eu

Papers for discussion
 Soft budgets and renegotiations in Public-Private Partnerships –Eduardo Engel et al.
 Renegotiation of transportation Public-Private Partnerships: TheUS experience – Jonathan Gifford et al.
 Institutional and political determinants of private participation ininfrastructure – Gonzalo Araya et al.
 The renegotiation of PPP contracts: An overview of its recent
evolution in Latin America – José Luis Guasch et al.

© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – Questions
specifically addressed by contributors
 Do parties usually renegotiate simply because of a lack ofcompliance with contact terms and departure from them?
 Do renegotiations imply economic losses associated with efforts
to evade contract terms?
 Do renegotiations reduce the strength of incentives for efficiency,
leading to a loss of global surplus?
 Are renegotiations more often the result of a need to adapt
contractual agreements to a changing environment, without any
loss, following the reasoning of incomplete contract theory?

 Are renegotiations more often the result of perceptions ofunfavorable outcomes (for example insufficient competition
leading to high margins for the private partners)?
“Contract renegotiation in the construction phase cannot
satisfactorily be explained by incomplete contract theory”© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – More fundamental
questions (1) Does contract renegotiations ever lead to better VFM for thepublic sector? If not, when should they be considered?
 What is the observed impact on the incidence/outcome ofcontract renegotiation in concession-type PPP (including shadow
toll arrangements) as compared to availability-based PPP?

 What is the observed impact of different SPV gearing ratios on
the incidence/outcome of contract renegotiation?
 Should awarding authorities ever consider a PPP project basedon receipt of an unsolicited offer?

 What role should portfolio/territorial management play in contract
renegotiation i.e. where an economic operator manages several
facilities in the same geographical entity?
 Should concession-type PPP be awarded differently fromconventionally procured infrastructure or availability-based PPP?
© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – More fundamental
questions (2) How far is the incidence/outcome of contract renegotiation linked
to specific aspects of the award procedure (e.g. the number ofcandidates short-listed, scope of negotiation, investigation ofpotentially unsustainably low offers, the nature of the award
criteria, price and quality balance in the award criteria etc.)?
 Should territories set a statutory limit on the length ofconcessions contracts to limit market foreclosure?

© EIPA 2014 - www.eipa.euAnd maybe….
 Does the incidence/outcome of contract renegotiation call intoquestion the classic contractual PPP model (whether demand oravailability based) as compared, for example, to alternatives suchas wholly/partly public finance (including DBO/performancecontracts), post-construction revenue securitisation, use of
mixed capital SPVs, regulated utilities or other privatisation,
finance via sovereign wealth funds, private equity funds, lower
SPV gearing ratios etc.?
 Should there be a “mixed market” of delivery models at territoriallevel?

Or even...
 Given the existence of a historically low level of benchmark
interest rates in some jurisdictions, should the public sector now
be drawing up a list of PPP contracts which could be profitablybought out?
© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – Supplementaryquestions at territorial level Should territories give guidance on the appropriate level ofresourcing for the contract management function?
 How should territories develop contract management capacity?
 To what extent can/should contract management become aprofessionalised/certified function?

 How should territories develop knowledge sharing within theterritory on contract execution outcomes?
 Should territories apply a mandatory/statutory post award
moratorium for a period of time on contract renegotiation?
 Could territories improve VFM in contract renegotiation by arequirement for ex ante and/or ex post independent verification(e.g. by external auditors, third party arbiter/independent panel,stakeholder participation etc.) or ex post transparency (e.g. EUobligation for a Contract Modification Notice for certain changes?
© EIPA 2014 - www.eipa.euAnd maybe….
“The effectiveness of contract renegotiation is influenced by thecontext in which it takes place”
SO….
 What are the immediate priorities for countries in facilitating anappropriate framework for contract renegotiation (e.g. legal
constraints such as on the scope of contract change and forinvestor protection, economic constraints such as actions toprevent market domination in sectors/sub-sectors, financial
management procedures, transparency obligations re PPP
execution, anti-corruption measures such as conflict of interest
procedures, asset disclosures by politicians and restrictions ondonations to political parties by PPP investors or operators, theeffectiveness of external scrutiny such as judicial, audit,parliamentary, civil society, IFI or media scrutiny etc.)?

© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – Supplementaryquestions for awarding authorities (1) What linkage is observed between contract renegotiation andattempts to transfer excessive/unmanageable risks (such assecuring land use permits or environmental permits) to economicoperators?
 How far should an awarding authority’s response to requests forcontract renegotiation by an economic operator be influenced by
the causes underlying the request (especially if there is a risk offinancial or operational failure of the economic operator)?
 What response is needed to address observed differences
between post-renegotiation contract VFM for changes requestedby the awarding authority and those of the economic operator?
 How far is VFM in contract renegotiation influenced by theexistence in the contract of change protocols for foreseen andunforeseen change? If so, what procedural arrangements should
be in place for such foreseen and unforeseen events?
© EIPA 2014 - www.eipa.eu

PPP contract renegotiation – Supplementaryquestions for awarding authorities (2) How can the awarding authority ensure it can measure thecontract’s continuing VFM during/after contract renegotiation?
 Is there evidence that contract renegotiation is less likely to resultin VFM if it immediately precedes or follows political change?
 What has been the impact of variable concession lengths (“thelowest NPV bid”) on contract renegotiation?
 Should awarding authorities require bidders to include a change
contingency reserve in their offers?
 What impact does contingency planning for materialisation ofrisks play in securing VFM in contract renegotiation?
 What impact does the quality of external professional advice playin securing VFM in contract renegotiation?

© EIPA 2014 - www.eipa.eu

PPP contract re-negotiation – Main causes
 Procurement errors by the awarding authority

 Demand forecast errors by economic operator
 General economic shocks/Force majeure events Mismanagement/under-resourcing by economic operator

 Project-specific changes in economic circumstances (e.g. need for
more/less service, service obsolescence, technological/bestpractice process change, insured risks becoming uninsurable etc.)
 Legislative change (controllable/non-controllable)

 Public acceptance change Attempted budgetary manipulation by the awarding authority
 Change of political control/orientation
 Collusion© EIPA 2014 - www.eipa.eu

PPP contract re-negotiation – Options for theawarding authority
 Change contract in favour of private partner (e.g. contract length,
contract scope, performance targets, input requirements such as
maintenance schedules, implementation of penalty régime,
payment amounts, payment flow, shift to partial or full availability
basis, tariff changes i.e. increases or delayed future reductions,changes to future tariff-setting process, future revenue orrefinancing guarantees, partial debt re-financing by public sector,
hand-back terms, lower DSCRs subject to lender approval,enhanced tax relief, other risk re-acceptance such as reassumption of change of law risk, redefinition of force majeureand relief events, change of hand-back arrangements etc.)

 Don’t change/leave private partner responsible for recovery
 Rebalance contract on the “something for something” principle
 Considering buying out the PPP contract

 Terminate the contract© EIPA 2014 - www.eipa.eu

PPP contract re-negotiation – Evaluating options
in case of requests by the economic operator
Determine approach on case by case basis based on:

 Responsibility for specific contract issues arising Responsibility in original contract for risk materialising Partnering behaviour of private partner

 Scale of recovery needed Scope for change (affordable?, foreseen in contract review
clauses? legally permissible?) Consequences of failure for public sector
 “Balance of power” between the parties (linked to attractivenessof alternatives)© EIPA 2014 - www.eipa.eu

PPP contract re-negotiation – Options forrebalancing the contract
 Activate guarantee options (if relevant) Portfolio/territorial re-negotiation
 Compensating adjustments by SPV (e.g. more sponsor equity, newequity investor, acceptance of public sector equity/boardrepresentative in SPV, future public sector gain sharing in upside
traffic, refinancing with gain sharing, future enhanced
monitoring/certification/audit, future requirement for performancebond/sponsor parent company guarantees, earlier recovery ofasset, lower user tariff, pass through of energy/insurance/subletting shared savings, requiring personnel change, requiring subcontractor change etc.)© EIPA 2014 - www.eipa.eu

European PPP ForumWEB SITE
http://www.eipa.eu then search for PPP

CONTACT DETAILS
Mr. Michael Burnett
Director, European PPP Forum

European Institute of Public AdministrationMaastricht, the Netherlands
Tel +31-43-32 96 286 E-mail: m.burnett@eipa.eu

Twitter: @eipappp© EIPA 2014 - www.eipa.eu