Many PPP contracts are renegotiated, often quite early in their lives, as described by Guasch in his book on renegotiation in PPPs [#123]. 'Renegotiation' refers to changes in the contractual provisions, otherwise than through an adjustment mechanism provided for in the contract. Renegotiation is something to avoid where possible, as Guasch also explains. Good use of adjustment provisions, as outlined above, can obviate the need for renegotiation.
Still, renegotiations will from time to time be needed, and governments will benefit from understanding good policy for renegotiations. Partnerships Victoria's Contract Management Manual [#20, Section 7.3] describes the understanding that public parties should have of the private party's financial health, as well as project performance. While not focused specifically on renegotiation, having this information and understanding will certainly benefit government as it considers decisions that could result in renegotiation.
There are a few examples of renegotiations that may offer some insights into good practice, and which have been documented. These include:
• The Melbourne Tram and Train concessions. When these concessions were in financial difficulty, the government decided to renegotiate rather than terminate, as this was expected to provide better value for money (see Ehrhardt and Irwin [#72]) To provide transparency and quality assurance on the process, the government announced early in the process that, after the negotiations were complete, they would be subject to an ex-post value for money analysis. This analysis was published as an Auditor General's report [#11], which describes the renegotiation process and results
• The United Kingdom National Air Traffic Services (NATS) PPP, also described by Ehrhardt and Irwin [#72], was a more controversial restructuring. The PPP Company faced falling revenue, because of a sharp downturn in air travel after the September 11, 2001 terrorist attacks in the United States. The company looked certain to default on its debt. The Board of the Civil Aviation Authority (the public party to the PPP) was split. The Board member directly responsible for the contract insisted the government should not renegotiate, stating the solution was a private sector financial restructuring, in which the lenders to the company would bear some of the losses. The majority of the Board disagreed however, and agreed to change the terms of the contract, as part of a package deal that also involved some debt restructuring.
In contrast to the United Kingdom NATS experience, the government of New South Wales managed to avoid renegotiating the PPP contract for a highway tunnel under Sydney's central business district when it went into financial distress. Instead, the matter was left to be resolved entirely through a private sector financial restructuring. Johnston and Gudergan subsequently reviewed the experience to draw lessons for PPP governance [#167].
Road contract renegotiations in Portugal and Spain, during the recent economic and financial crisis, present an interesting case of renegotiation under fiscal stress-but lessons are not yet reported. The British National Audit Office already reported on similar renegotiations for reducing service levels and obtaining project savings.