“Cutting costs to the bone”: the Portuguese experience in renegotiating public private partnerships highways during the financial crisis

How can governments renegotiate public private partnerships (PPPs) in order to reduce public expenditures? In 2011, in the aftermath of the financial and sovereign debt crisis, Portugal asked for financial assistance from the European Union, the European Central Bank, and the International Monetary Fund (“the Troika”). Annual payments to PPPs in the highway sector represented one of the major burdens of public finances. Over the last two decades, Portugal used PPPs to close the “infrastructure gap” by building 4000 km of highways. The Troika demanded that the Portuguese government renegotiate these PPPs in order to reduce annual payments by 30%, and to develop a more sustainable model. This paper describes these renegotiations. We also discuss the strategy of these renegotiation, in order to reduce costs focus on the main motivations for the public and private sector to conduct this process. A reduction of 18% on future payments was achieved, by using five main strategies: (1) reduce operational service levels; (2) transfer operational service to the public sector, at a lower marginal cost; (3) increase the period between “major repairs”; (4) reduce private sector profitability; and (5) change the risk allocation. We detail each strategy and analyse their respective impact on total cost reductions. This paper should be useful to both academics and practitioners, as it describes a complex renegotiation process that led to gains for both sides and reduced public payments in one of countries that used PPPs most aggressively worldwide.