Letting aside the mutual gains resulting from completing the original contract terms, the arguments of SBC and imperfect enforcement emphasize it is the private partner that benefits from the contract revision, thus suggesting it has strong incentives to call for the revision.72
However, in the study of Guasch, Laffont, and Straub (2006), almost two-thirds of the concession renegotiations were initiated by the public-sector party, and most of them took place in periods surrounding elections. Consistently with these facts, a number of political motives have been proposed in the literature to explain the interests of the public-sector party itself in revising PPP contracts. Naturally, renegotiations involving political interests are likely to go far beyond contract incompleteness issues.
For instance, a government wishing to increase its chances to be re-elected may seek for financing investment and expenditure in public works that create jobs and boost economic activity. Facing fiscal or political constraints to expand spending, the government may attempt to get private partners to do it (Guasch, 2004). In a regular budgetary process, issuing public debt to finance additional spending requires approval from the opposition parties, which may block the public sector's spending plan if it reduces their own electoral chances. Thus, instead of negotiating with the political opposition, the public sector may prefer to call for PPP contract revisions and increase the investment requirements to be financed by private partners (Engel et al., 2006). Since these renegotiations are not included in the regular budgetary process, the government circumvents the opposition's scrutiny and reaps the political benefits resulting from higher present spending, e.g. a higher probability of being re-elected. Private partners, on the other hand, may obtain better contract terms, higher user charges, revenue subsidies, an extension in the contract duration, etc.73
In the short-run, both the public and private partners benefit from politically-oriented renegotiations, but the resulting bias towards over-spending in the present may imply an intertemporal resource reallocation that negatively affects social welfare. In this context, ensuring the public sector is accountable to the Parliament or independent oversight agencies for the PPP agreements it negotiates would help to reduce opportunistic behavior leading to politically-oriented contract revisions. Beyond the accountability issue, the public sector agency running a concession program should be given appropriate incentives. For instance, if the agency is part of the ministry of public works, whose purpose is naturally to build new projects, it will probably attempt to expand the public works program (Engel et al., 2006).
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72 In the SBC argument, the public sector's gain results from avoiding the costs of a concession termination.
73 Engel et al. (2006) describe two types of concession renegotiation often used in Chile to anticipate spending: the public sector changed the contract terms to obtain additional works from the concessionaire, or both parties exchanged an 'insurance premium', i.e. the private-sector party made an upfront cash payment and was entitled to a potential concession extension. Twelve out of the sixteen highway projects awarded by 1998 were revised in the following five years. The revisions required the provision of additional infrastructure, increasing 15% the value of the original investment plans. Renegotiations set the so-called 'complementary contracts' which were agreed bilaterally and without public review. Since Chile had undergone a recession in 1998-2002, traffic flows grew less than expected, and tax revenue were insufficient to undertake public works. Concessionaires were granted a public sector guarantee for the toll revenue that would have collected if traffic had grown at certain annual rates during the contract life. Should actual revenues increase below such rates, the concession would be lengthen by up to almost 10 years and the public-sector party would pay the remaining difference. Thus, the renegotiation proposed an asymmetric variable-term contract to replace the original fixed-term contract. Concessionaires, on the other hand, had to pay an 'insurance premium', around 8 % of the guaranteed revenue, in the form of additional investments. Thus, the public sector engineered an intertemporal transfer, receiving additional current infrastructure in exchange for a guaranteed income that future administrations would pay.