The main instrument to respond to potential economic distress situations is to include -in the regulatory framework or in the PPP contract itself- specific rules contemplating the possibility of extraordinary reviews that enable adjustments in the event of unforeseen events not taken into account when setting the current tariffs.
The need for these rules clearly depends on the current tariff system. In cost of service (or rate of return) regulations this rule is not necessary and therefore, the review decision is internal. Tariffs are adjusted every time an imbalance appears between tariffs and costs or, what is the same, when the rate of return moves away from the capital opportunity cost. These situations are featured as economic distress; thus, this type of problems could not appear in cost of service regulations159.
Table 31: Extraordinary Tariff Review Rules
| Country | Sector | Exists | Special features |
| UK | Water Energy | YES | Where circumstances have a substantial adverse effect on the appointed business |
| Australia | Electricity | YES | An event that is beyond the reasonable control of the provider • Capital expenditure required exceeds 5% of the value of the regulatory asset base |
| Brazil | Electricity | YES | Should there be significant alterations in the concessionaire's costs… the Granting Power may, at any time, review tariffs for the purpose of maintaining the economic and financial balance of the contract |
| Colombia | Electricity | YES | Act of God or Force Majeure causes that seriously compromise the company's financial capacity |
| Chile | Water | YES | As an exception and mutually agreed upon where there are founded reasons for important changes in the assumptions made for the assessment |
| Peru | Water | YES | Should the economic and financial balance be broken • Variation of at least 5% in costs (+) revenue (-) or investment (+) |
| Electricity | YES |
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Source: MacroConsulting on the basis of regulators' information
In contrast to the cost of service regimes, the central feature of regulatory mechanisms by incentives (price cap) consists of periodical tariff reviews externally set, generally every four or five years. In these cases, it is of the essence the existence of specific rules contemplating the possibility of tariff reviews in the face of events substantially modifying the economic balance of the contract. Table 31 summarizes the tariff review rules and their main features in different countries and sectors.
As shown in Table 31, rules may be general so as to contemplate imbalances due to different causes, leaving the need of making adjustments at the regulator's discretion. Alternatively, rules may define specific variation thresholds in certain variables, which are measured as the difference between the values projected in the last review and the real values observed.
Setting specific thresholds in the variation of certain variables (as in the case of the water sector in Peru and the electricity sector in Australia) is a way of delimiting the regulator's discretion as well as the risk of variation in costs or revenue the company must face before the economic imbalance is considered to have been substantially affected.
A common element to all these rules -and central to the generation of incentives to productive efficiency that price cap regimes look for- is that extraordinary review causes relate to the existence of external events affecting the economic balance. Events controlled by the company are implicitly or explicitly excluded from these reviews.
Another common aspect is that reviews are asymmetrical, given the fact that they are designed to cover just the contingency consisting in the companies' unfavorable changes. This relates to generating the regulators' commitment to ensure that extraordinary reviews will not be used to obtain benefits the company may get as a result of efficiency levels higher than those established in ordinary reviews. In this sense, it is interesting to see how the rule works in Chile, where extraordinary reviews must be "mutually agreed upon".
In cases where the PPP's revenues come -in whole or in part- directly from the public sector, the logic of the review processes is similar: to protect the company from changes beyond the company's control and, at the same time, to avoid compensating the company due to the public sector's own failures. Payments reviews in these cases may be based upon price benchmarks or on comparable cost estimations for the public sector ("public sector comparator" PSC).
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159 Guasch (2004) presents clear evidence to this effect. The likelihood of renegotiating concessions in cost of service regulations is 20%, whereas such likelihood in cap prices regulations is 56%.