Public Private Partnerships Renegotiations in Transportation

There are multiple definitions of public–private partnerships (PPPs) (see, for instance). A simple definition is that a PPP is a procurement model where the private sector assumes a significant share of risk, under a medium- to long-term arrangement, which is typically a contract.

The use of this procurement model has been growing, based on its potential benefits in terms of delivering value for money (stimulating higher efficiency levels). However, what makes it more attractive is the ability to utilize private capital to build, expand, and/or rehabilitate public infrastructure and services.

Nevertheless, the use of PPPs has experienced a number of shortcomings, such as the higher cost of capital, opportunistic behaviour (by both parties), and, very commonly, the need to renegotiate, which often (but not always) reduces the social value of the projects. In some cases, these renegotiations/adaptations of the original contract have benefited both parties.

PPPs are structured through a special purpose vehicle (SPV), consisting of a ring-fenced approach towards risk, which ensures benefits for both public and private sectors.

This chapter provides an overview of the concept of Public–Private Partnerships by describing several definitions, as well as the main concepts of PPP, such as the difference between public procurement and full privatization, the different alternative models, how PPPs operate and are structured, and a detailed account of the issue of renegotiations.

Portugal is an interesting case study on PPPs, given its massive use of the model. This has enabled the unprecedented development of infrastructure networks, although this came at a high cost for the public budget, both directly (through annual payments) and indirectly (through excessive renegotiations that increased the annual payments).

The preferred method has been contractual PPPs under the form of concession agreements, which typically are DBFO models (design-build—finance-operate), although not exclusively. Both the central and local governments have developed PPPs. A total of 35 PPPs are currently in operation nationally in Portugal, with more than 100 at the local level. The analysis that follows only focusses on national-level PPP. The Portuguese experience is characterized by two main strengths: (1) An acceleration of the construction of much-needed infrastructure in the country, which otherwise would have been even slower; (2) The elimination of budgetary overruns during the construction phase (as the construction risk was allocated to the private sector). However, there have been some noteworthy pitfalls, particularly regarding the following: poor choice of investments (investments with little economic rationality and with zero return for the taxpayer); ineffective PPP contracts (where value for money was not measured; the risk of renegotiations and financial rebalances with contingent liabilities); and the unsustainability of Public Finances (as a result of insupportable liabilities for the future which compromise the budgetary flexibility of the State Budgets for the next 20/30 years).

The Court of Audits also identified two major deficiencies in the Portuguese experience, namely: the structure and management of PPPs, ranging from conception through to the preparation, tendering, adjudication, alteration, inspection, and monitoring of processes; and the budgetary process with regards the transparency and reliability of information, and the lack of detailed multiannual information.

Overall, the allocation of risk has been unbalanced, with the public sector often assuming too many risks, which, together with the above-mentioned pitfalls, resulted in multiple renegotiations. Between 1995 and 2012, a total of 254 renegotiation events took place. This abnormally high frequency of renegotiations raises the question as to whether PPPs should be considered to be a natural part of a long-term contract, or whether they are an undesirable feature, which reduces the efficiency and value for money of PPPs.

This chapter addresses the case of a railway concession (Fertagus—linking the north and south bank of Lisbon in the “25 de Abril” bridge) that was launched in 1999. This was the first rail PPP developed in Portugal, with the initial project being designed under a Project Finance scheme, with no public payments, but with a traffic band guarantee (a minimum guaranteed level of traffic). As traffic in the first years was substantially below forecast, the Concessionaire asked for financial compensation through a renegotiation. Several contract clauses were changed in 2005, with the financial compensation from the public sector being followed by a reduction in the contract period, a reduction in the project IRR, and a shared upside revenues mechanism, as well as conceding other conditions and changes in the risk allocation matrix that favoured a more efficient concession. This led to a reduction in the financial cost for the Government. Furthermore, after 2010 the Concessionaire achieved financial sustainability without further public compensation. We describe this case and analyze it from the point-of-view of three main aspects: changes to the contract, in particular those regarding the acquisition of rolling stock and the debt scheme; flexibility regarding the tariffs policy; and the capacity to negotiate fairly between the private and the public parties.

This chapter presents the case of Lusoponte, a bridge concession in the Lisbon Tagus area, connecting the North and South bank of the Lisbon area. The initial project was designed with Project Finance, with no public funds being involved (except EU grants). The Concessionaire had the responsibility of building a new bridge (12 km long—“Ponte Vasco da Gama”), and, simultaneously, would operate and maintain the existing (older) bridge (built in the 1960s—“Ponte 25 de Abril”). The contract that was signed in 1994 established that the new bridge was to be opened in 1998, and up until then, the tolls of the older bridge would be increased by almost 300%, in order to attain the same level of tolls for the new bridge. This led to massive demonstrations on the old bridge. Accordingly, the new government decided to cancel the tolls increase after 1995, which lead to the multiple renegotiations that are described in this chapter. In the end, the public sector had funded more than 60% of the initial investment, mainly in the form of compensations for the loss of revenues. We go on to describe this case in detail and analyze it from three main points-of-view: the problem of incomplete contracts; the Government’s negotiation position; and the perception of the users of the old bridge that the increase in tolls was a tax and not a payment for a service.

The Metro Sul do Tejo Light Rail System is a 30-year concession, which was launched in 2002, with an overall investment of 325 M€ (including rolling stock), a total of 13.5 km of extension, and 19 stations. The project is located on the South Bank of Lisbon, in a relatively highly populated area, serving both local and inter-city travels to Lisbon (connecting to the main railway network). The project suffered from a number of problems which resulted in expensive renegotiations. Some of the causes of these problems are typical in transport projects, but two need to be highlighted: a lower level of traffic than expected, and delays in the construction. Both problems had a significant negative impact on the financial balance of the concession, and both gave reasons for the Concessionaire to ask for a renegotiation. These motives were grounded in more structural problems regarding the structuring and delivery of the project. We have identified three of these problems in our analysis: First, there was a lack of planning and capacity from the Public Administration; second, after 8 years in operation, the service was not economically viable without further support from the public sector and accordingly the construction of the second and third phases were suspended, which is linked to the third problem, namely; political instability (with four governments during the 5 years of the project), which also led to a lack of definition from the public sector.

The AEA highway concession was signed in 1998 and the new highways were opened in 2002, subject to a 30-year concession period. The total length of the highways is 170 km, with a total investment of 567 M€.

The Litoral Centro concession is located in a coastal area, between the two largest metropolitan areas (Lisbon and Porto), totalling 92.7 km. This is a real toll concession, where the private partner is responsible for the entire demand risk and for collecting the tolls. However, the concession connects to a former SCUT—a shadow toll road—which has been changed to a real toll highway in 2011. This had a significant impact on the levels of traffic for a concession that was already suffering from over-optimistic initial forecasts. As a consequence, in 2011 the Concessionaire requested a compensation of over 1 billion Euros from the Portuguese government. After several years of legal actions against the Concessionaire, the Portuguese government was finally obliged to pay a much-reduced compensation of 176 M € to the Concessionaire in 2017 (a lump sum of 42 M €, and also annual payments).

The Douro Litoral concessions is a highway concession, totalling 1 billion euros of investment, which is located in the Metropolitan Area of Porto. It has a crucial role in diverting traffic from the city centre, however, the levels of traffic have always been less than the initial forecast and the financial stability of the concession was seriously impacted by the excessive optimism regarding forecasted levels of traffic. This is a real toll concession, where the Concessionaire assumes all the traffic demand risk.

The fact that the level of traffic was lower than forecast was also a result of change in the network of roads feeding into the Douro Litoral highway. For after awarding the Douro Litoral concession, the Portuguese Government abandoned the sub-concession of the Centro highways project and thus the continuity of the A32 highway to Coimbra was put in check, which thus annulled the logic of establishing an alternative and competitive corridor to the A1 for the highway links between Lisbon, Coimbra, and Porto. In addition, the introduction in 2011 of tolls in SCUTs also affected the level of feeder traffic.

Based on these events, the Concessionaire submitted a request for financial rebalancing, and thus initiated the arbitration process that would culminate in the submission of a request for financial compensation in the amount of €1350 M €.

In 2017, the Arbitration Court decided to partially alter the action, and ordered the Portuguese Government to return the amounts already paid regarding two taxes/services (the vehicle identification system—SIEV, and regulatory tax—TRIR) in the amount of approximately €1.0 M €, as well as the payment of a 42.0 M € lump sum during the first half of 2017, following by a series of half-yearly payments that were to be made from November 2017 to November 2034, ranging in amount from €3.5 M € to €6.5 M €. Even after this decision, the Concessionaire’s liabilities remained higher than its assets, which led to the (non-consensual) intervention by the financiers.

The initial government forecasted values turned out to be incorrect in relation to the real levels of traffic. The renegotiation of 2010 was also inadequate, as it failed to update the initial forecasted values to reasonable values in virtue of the expected decrease resulting from the introduction of tolls (which the Regulator expected to be around 15% on average, based on international experiences). Despite the regulator’s forecast of a reduction of 15% in traffic, government forecasts were extremely optimistic in the case of several concessions, and failed to take into account the historical evidence of the pattern of traffic, as well as the negative effect of introducing tolls. For example, errors of 51 and 59% in the forecasts were, respectively, verified for two cases—Grande Porto and Costa de Prata.

The introduction of tolls in SCUTs has created a much greater risk system for the public sector in maintaining the profitability of private operators, which in turn represents an overall negative economic value for society as a whole. With the introduction of tolls in the SCUTs, the concessionaires in effect no longer assume the traffic risk, which is now fully supported by the public entity—Infraestruturas de Portugal S.A. However, this change did not lead to a reduction in the forecast level of profitability for the private shareholders, as would be expected, due to the downward adjustment of the risk profile of the projects.

However, this change gave rise to overcosting for users, and has reduced the economic benefits that users expect to gain from using highways, based on the associated saving of journey time due to the habitual lower level of traffic on highways.

Overall, this decision to charge tolls on SCUTs has been negative for society. Infraestruturas de Portugal saw their costs (payments to the private partners) increased with this renegotiation. The real revenues were substantially below the forecast, which led to a small benefit for the SOE. There was a substantial reduction in traffic, which explains the deviation in the forecast revenues.  

Between 2012 and 2015, the Portuguese Government renegotiated a number of road concessions to decrease the overall cost of the PPP system. This was carried out as part of an overall strategy to decrease public spending, under a financial assistance programme which became known as the “Troika renegotiations”.

The effect of this renegotiation, or series of renegotiations, was an average reduction in public payments for PPP road concessions of 18%. This was mainly achieved by reducing the level of service and by postponing major repairs. These changes did not affect the profitability of the private partners, however, they reduced shareholder profitability, due to the reduction in public payments. Nevertheless, this reduction was accepted by the private parties, who maintained the position that it was more beneficial to cooperate and maintain these long-term projects in operation.