Economic rebalancing refers to the practice of modifying the financial conditions (i.e. 'economic equilibrium') that were agreed as part of the original contract, with the intention of preserving or restoring the original economic equilibrium of the PPP contract. This can occur after a risk borne by either party has materialised and has been determined to have economic consequences for a party. For example, a force majeure event, a scope change, change in macro-economic conditions, change in law, or a major change to demand.
Rebalancing principles and provisions are specific to particular civil law jurisdictions (e.g. several countries in Latin America) and differ from the provisions of a typical common law PPP contract. In common law jurisdictions, events such as scope changes and changes in law are typically managed under specific scope change provisions and claims procedures, which are detailed in Section 3.5 (Claims). Rebalancing regimes, when compared to comparable provisions in common law jurisdictions, are more fluid mechanisms to deal with a variety of issues.
Rebalancing may also be available after an opportunity has materialised in favour of the Procuring Authority. For example, if the construction of an adjoining bypass increases demand and therefore toll revenue on a PPP road project, the PPP contract could be rebalanced in favour of the Procuring Authority with reduced tariffs or a reduction to the contract period.
Rebalancing may also be required because of a contract renegotiation. For example, if the Procuring Authority requested a significant increase to the scope of the project and this was agreed to by the Project Company through a renegotiation. Rebalancing may then be needed to restore the economic equilibrium of the PPP contract.
| A perspective from Germany In Germany, it is not common for a Procuring Authority to be successful in demanding a rebalancing, unless this option - and a procedure for achieving it - are already set out in the contract. |
In general, rebalancing can be implemented through a broad range of mechanisms. For example, Project Company compensation, change in tariff rates, change in contract duration or a change in future investments payable by the Project Company. A combination of these and other economic/ financial measures may also be available.
A typical process involves the Procuring Authority calculating the economic and financial rebalancing it considers is required and presenting it to the Project Company with a proposed approach to effect it. If the Project Company is not satisfied with the proposed rebalancing, it has a right of appeal against the Procuring Authority through administrative rights or it can trigger arbitration or court proceedings to receive a final determination.
For the purpose of the data analysis explored in this chapter, the study results do not differentiate between renegotiation and rebalancing.