PPP projects are long-term, and are often risky and complex. For example, a new toll highway faces obvious risks such as fluctuations in demand, but also less-obvious risks such as demand to provide more interchanges in the future, or install new traffic management technologies. More complex PPPs, such as water concession contracts, are even more exposed to unpredictable changes. Network assets may last more or less time than assumed. Demands for changes in treatment and distribution technologies may flow from new health research; while urban growth may create large investment demands, sometimes in unpredicted locations.
This means PPP contracts are necessarily incomplete-that is, they cannot fully specify all future possibilities. The PPP contract therefore needs to have flexibility built in-to enable changing circumstances to be dealt with as far as possible within the contract, rather than resulting in re-negotiation or termination. Such adjustment mechanisms typically aim to create a clear process and boundaries for change.
The concept of 'financial equilibrium', common in civil law systems, provides a broad mechanism for dealing with several different types of change, as described below. Other mechanisms are more specific-such as mechanisms for changes to service requirements, changes to tariff formulae, other cost adjustments in response to market changes, or dealing with refinancing gains, also described in turn below.
As described in the EPEC Guide to Guidance [#83, pages 37-38], the administrative arrangements and processes for handling change are often further defined as part of the contract management framework and materials (see Section 3.7.1: Establishing Contract Management Structures). While rules and processes can be specified for changes, room for discretion is likely to remain. The contract therefore needs to define a process that gives both public and private parties confidence that their interests will be respected.