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This book provides a theoretical basis for understanding the phenomenon of renegotiations in Public Private Partnerships (PPPs). It analyzes the case of transport projects, and provides empirical evidence from a variety of real-world projects. What drives renegotiations? Why are some projects more likely to be renegotiated than others? What are the outcomes? How can we improve the performance of renegotiation processes? These questions form the core of discussion in this book. PPPs are a procurement model for the delivery of infrastructure and public services that have experienced significant growth over the last three decades, particularly in terms of the development of transportation projects. The empirical evidence suggests that most PPP projects are inevitably renegotiated, i.e., the original contract needs to be adapted to new and unforeseen circumstances. The impacts of these changes on the welfare of the respective stakeholders are frequently asymmetric. Most academic research and professional guidelines are focused on PPP contract design and preparation of the procurement process, and very little has been published on the management and, mainly, the process of renegotiating that will – in all likelihood – occur. This book fills this gap in the academic discussion. Several country-based analyses and case studies from Europe and the Americas provide the reader with practical applications of the theory.



Chapter 1. Introduction

The use of PPP as a procurement model is growing worldwide. The relevance of PPPs is mainly due to the phenomenon of the growing demand for infrastructures, as well as the fact that governments are becoming increasingly subject to fiscal pressure. However, PPP have exhibit a relevant pitfall—renegotiations. This book re-examines the theoretical justification underlying the phenomenon of renegotiations, and also analyses the empirical contributions from around the world that have tried to identify the main determinants for the likelihood of renegotiations, as well as their motives and the outcomes. The book also provides a project-based analysis of selected case studies from different countries, to help understand why and how renegotiations come about. To the best of our knowledge, this book is the first attempt to provide a comprehensive and holistic review of the theory and empirical evidence of PPP renegotiations.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 2. Defining PPP Renegotiations

PPP renegotiations are often perceived to be a pitfall, or a failure of the project. This assumptions is based on the premise that if the contract were to function appropriately, then renegotiations would not even be necessary. However, PPPs have characteristics which justify a certain level of renegotiations, as they are long-term and incomplete contracts, which involve high levels of investment, in highly-regulated and politically-sensitive markets. Renegotiations can well represent a natural development of the evolution of the contract (as no contract is capable of contemplating solutions for all circumstances that can arise in the future) and often enable a better adaptation of the obligations of the parties to new conditions. This chapter will discussed the concept and rationale of PPP, based on the three different perspectives provided by the economic literature: (1) the contract theory; (2) the transaction cost theory (which can also be related with the contract theory), and; (3) the institutional & governance theory.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 3. Theory on PPP Renegotiations

Renegotiations can be understood from the perspective of three main economic theories: contract theory, transaction cost theory, and institutional theory. Contract theory provides an explanation for renegotiations based on the simple fact that contracts are necessarily incomplete. The consequences of such incompleteness, is that the contract can be vulnerable to the behaviour of each agent. Transaction cost theory considers contract incompleteness to be a rational choice of the parties involved. Incompleteness arises from the fact that is simply to costly to developed quasi complete contracts. Finally, institutional theory provides a macro perspective over the process, i.e., the regulatory, economic, legal, political and institutional environment can influence and impact renegotiations.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 4. Renegotiation Analysis

While the previous chapter provided a theory-based perspective over renegotiations, this chapter focusses on a set of research questions with the aim to provide a comprehensive and systematic overview of the empirical research on PPP renegotiations. The objective is to provide evidence from real world examples and research, on how renegotiations occurred. Based on the existing literature, our key research questions can be posed as follows:
  • How frequent are renegotiations in PPPs?
  • Who initiates the renegotiation process?
  • When do renegotiations happen?
  • What are the main motives for the occurrence of renegotiations?
  • What are the main results of renegotiations?
  • What are the main determinants of renegotiation processes?
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 5. Country Analysis

This chapter focuses on providing a country-based overview, for understanding the renegotiations processes that will be discussed in Chap. 6. Each country—USA, UK, Brazil, Chile, Portugal, and Spain—will be presented and discussed based on the following structure: framework,legal and regulatory, governance and management, and projects overview. The countries were selected to ensure a mix of mature environments for PPP development and also more recent adopters, but also to ensure some geographical diversity.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 6. Renegotiation Case Studies

Renegotiations are project specific phenomenon’s, and depend on the project characteristics as well as contractual features and governance model. Therefore, this chapter provides a unique perspective over PPP renegotiations covering a range of six projects, developed in the countries presented and discussed in the previous chapter. Each renegotiation analysis will cover the following topics:
Introduction (describing the main features and objectives of the project and also the public partner);
The PPP process (describing the tendering and the winning bid—the private partner);
The financial structure of the PPP;
The risk allocation matrix;
The renegotiation case;
The main findings from the case study.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento

Chapter 7. Conclusions

The global experience with PPP arrangements has been largely trial-and-error, with expensive lessons for governments and citizens/users alike, and much more rarely, for private partners. The underlying economic principle of PPPs is to achieve greater value for money—i.e., the delivery of better services at lower costs. However, the complexity and liabilities inherent to the PPP model have often eroded any of the advantages from applying competitive market pressure to public infrastructure sectors. The PPP model simultaneously has fierce advocates and fierce critics, although the latter group has not been able to provide feasible alternatives to finance public infrastructure without either private involvement, or realistic alternatives to the use of private financing with entirely different arrangements. The trend therefore has been to incrementally build upon and improve existing PPP models.
Carlos Oliveira Cruz, Joaquim Miranda Sarmento
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