Use of the Various Instruments in Distress Solutions: Evidence from Latin America

In practice, all the instruments available to the regulator are used in the adaptation and renegotiation of public-private participation contracts. Tariff increases, changes in the amounts or the time profile of investments, direct pass-through of costs or changes in payments to the government, etc. are all the elements that come into play in redefining the economic equilibrium during the renegotiation of a contract. Although the correlation between distress and renegotiation is not perfect, the analysis of the relative incidence of each such variable in the renegotiation in Latin America presented by Guasch (2002) in a study of over 1,000 Latin American concessions is a valid proxy of the available tools for distress situation. The outcomes are illustrated in Table 32. 

Table 32: Incidence of the Instruments in the Renegotiation

Source: Guasch 2002 Table 1.17

As it is evident from Table 32, tariff adjustments and changes in investment amounts and timing are the most widely used instruments in the renegotiation of concession contracts in Latin America.

Another aspect that stands out strongly from the evidence provided by Guasch is that the vast majority of renegotiation processes are favorable to the service providers, to the detriment of users. Thus, the number of renegotiations that led to tariff reductions is four times lower than the number of those that led to increases. A similar proportion applies to the postponement and delaying of investments (for the company's benefit) and the acceleration of investment targets (for the benefit of service users).