Following Guasch, Laffont and Straub (2007) we investigate the determinants of renegotiation by performing random probit estimations. Our dependent variable is a dummy equal to 1 if there is a renegotiation in project _i_ with regulator _j_ in country _n_ at time _t_ . The probit model is given by: where I [.] is the indicator function, taking value 1 whenever the statement in brackets is true, and 0 otherwise; Rijnt is the dummy variable indicating whether concession _i_ with regulator _j_ in country _n_ at time _t_ is renegotiated; Xit is a vector of project variables (regulatory regime, subsector, duration, investment, project age, government guarantee dummy); Mnt is a vector of environmental characteristics (GDP growth, government corruption); IRAj is a binary variable taking value 1 if regulator _j_ is an independent regulatory agency; Fit are financial performance variables for project _i_ in year _t_ (discussed below); and eijnt is the error term.

We want to test whether the financial performance variables Fit are significant predictors of renegotiation. We experiment with a number of alternatives, corresponding to the different columns of Table 2: (i) Leverage: total liabilities divided by total assets, (ii) Distress 1: binary variable taking value 1 if the firm has leverage greater than 1 standard deviation above the mean for its country, (iii) Distress 2: binary variable taking value 1 if the firm has a working capital ratio less than 0.5,<sup>15</sup> (iv) ROA: earnings before interest and tax (EBIT) divided by total assets, (v) Performance 1: binary variable taking value 1 if the firm has ROA more than 1 standard deviation below the mean for its country. (vi) Performance 2: binary variable taking value 1 if the firm had negative ROA in both of the previous two years.

The results are presented in Table 2. The first row shows that price cap contracts have a higher incidence of renegotiation, which lends some weight to the view that they may in practice resemble hybrid regimes. This result is driven in part by the unique nature of the Brazilian federal road contracts however, which state that tariffs will be revised in the event of changes to the investment programme. This happens frequently, but is not considered a renegotiation as it is a clearly stated contingency of the contract (see Veron & Cellier 2010).

Importantly, the financial performance variables are not significant predictors of renegotiation. Firms with higher leverage and weaker profitability are no more likely to experience renegotiations than others.<sup>16</sup> Moreover, this result holds for each of the country sub-samples (results not reported).

> 15 The working capital ratio is defined as current assets divided by current liabilities. A ratio below 1 is typically used as an indicator of liquidity problems. Given the highly leveraged nature of project finance transactions however, a ratio below 1 is extremely common. We therefore choose a more extreme ratio of 0.5. Even at this level, over a third of observations classify as being in “distress”.

> 16 The distress variable is significant at the 10 percent level, but if the threshold is changed from 1 standard deviation above country mean to 1.5 or 2, this significance disappears.

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