The fact that PPPs are routinely renegotiated has been known since Guasch (2004) examined nearly 1,000 Latin American concession contracts that had been awarded since the mid-1980s to 2000. Guasch showed that 54.4 percent of the contracts in the transportation sector (roads, ports, tunnels, and airports) had been renegotiated. The cost of renegotiations of Mexico’s program of highway PPPs of the late 1980s has been estimated to have cost Mexican taxpayers more than US$13 billion, in addition to the original investment cost of $13 billion. In Chile, 47 out of the first 50 PPP concessions awarded by 2005 had been renegotiated by 2006, adding almost a third to the original planned investments (see Engel et al. 2009). A recent review of highways in Colombia, Peru, and Chile (Engel et al., 2019) analyzed 535 renegotiations of 59 highway PPPs. The average number of renegotiations per year was 9.5 percent of initial investment in Colombia, 3.6 percent in Peru, and 1.3 percent in Chile. More than 45 percent of renegotiations (by dollar amount) take place in the construction phase. In Chile (the only country for which the data was available), more than 60% of the renegotiated cost falls on future administrations.

PPP contracts are inherently long-lived incomplete contracts because unforeseen circumstances may arise over the life of a concession. Thus, renegotiations can be expected to occur over time, and they provide the flexibility necessary to adapt to changing conditions. While this is a reasonable argument for renegotiations it ignores two disturbing features of real-world renegotiations of PPP contracts.

First, they often occur in the early stages of the contract: Guasch (2004, p 14) showed that, on average, renegotiations started after only 2.2 years of the award of the contract. Moreover, when considering contracts that were renegotiated, in 60 percent of the cases contracts were first renegotiated in the first three years. Engel et al. (2009) showed that 78 percent of the renegotiated amounts were awarded during construction. One possible explanation for early renegotiations is that projects are procured and awarded with early-stage designs, which do not include detailed specifications. This leads to increases in costs as details are specified and negotiated during construction. Awarding a project with final specifications may lead to fewer renegotiations, but this is slower and more expensive, so inefficient from a political point of view.

Second, renegotiations tend to favor the concessionaire. Guasch (2004) has shown that twothirds of contract renegotiations led to tariff increases, 38 percent to extensions of the concession term, and two-thirds to a reduction in investment obligations. Engel et al., (2009) showed that most renegotiations of Chilean PPPs, led to higher costs for the original project. Though in principle renegotiations may allow governments to expropriate concessionaires after they have sunk their investment, in practice it seems that in most of Latin America, renegotiations favor the private partner.

The high frequency of renegotiations is the result of poor governance and rules. When contingencies such as a fall in demand or a cost overrun occur, the PPP expects to be made whole again by changes in the contract, so the “economic equilibrium” is recovered. On the other hand, good results are not renegotiated, so that the PPP obtains a positive return in all events.<sup>22</sup> The combination of competition and the expectation of renegotiations encourages lowballing in the PPP auction. Any losses will be recouped by future bilateral bargaining.<sup>23</sup> 22 General laws in many countries in Latin America and Spain support this expectation. Legal reforms (see, for example, the reform of the Chilean Concession Law of 2010) are required to avoid this source of renegotiations.

23 This gives an unfair advantage to firms that specialize in lobbying activities. See Engel, Fischer and Galetovic (2021, p20). Campos et al (2021) showed that Odebrecht underbid in PPP and traditional projects if there was competition for the project and the expectation of renegotiations.

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