For any renegotiation, the starting point should be that the cost implications for the Procuring Authority of renegotiating are less than the financial outcome of doing nothing.
However, the assessment of a proposed renegotiation should be as comprehensive as possible, and should not be limited to the direct consequences of the change. For complex renegotiations, it may be in the interests of the Procuring Authority to carry out a forward-looking audit as well as a review of the relevant contracts. This will help to avoid any unforeseen effects on other contractual provisions that could adversely affect the Procuring Authority's interests.
The Procuring Authority should distinguish between the realisation of a risk that was allocated to the Project Company, and a genuine change in circumstance that was not contemplated at commercial close. Ideally, the former should not trigger the need for a renegotiation. As a general principle, a renegotiation should not be used to address the following:
• Any event that was foreseeable at financial close
• Any event that would affect the Project Company in its ordinary course of business (e.g. a general change of law)
• Materialisation of a risk allocated to the Project Company or invalid assumptions made in its pricing or the scope of work required in relation to those risks
• Any distress arising directly or indirectly from the performance, action or inaction of the Project Company
• Any failure by the Project Company to secure financing for the project
EXAMPLE European Union environmental requirements The parties to the Segarra Garrigues Irrigation System project in Spain were forced to change the scope and design after the European Court of Justice ruled that it was not meeting its obligations to protect birdlife. These changes were renegotiated in 2013 and 2015 and the changes will mean that less water is available for irrigation once the scheme is fully operational, so a further renegotiation is likely to take place in the future. For more details see the Segarra Garrigues Irrigation System Case Study. |
In practice, it is not uncommon for the events described above to lead to renegotiation, as is detailed in Section 4.3 (Summary data analysis), where causes such as increased construction costs are shown to be common. However, this does not alter the fact that value for money will likely be diminished where these risks - which were priced into the original bid - are not borne by the Project Company.
This type of circumstance may leave the Procuring Authority in a difficult situation when assessing whether to renegotiate the contract. On the one hand, the Procuring Authority needs to ensure that public sector interests are protected, and the Procuring Authority is retaining the value for money forecast at financial close. On the other hand, it has a sometimes-conflicting interest to ensure that the underlying public services continue to be provided.
The Procuring Authority should weigh up not only the risks of agreeing a worse position for itself, but also of agreeing a better position if it is at the expense of the Project Company. It may be a short-term victory if the Procuring Authority 'wins' the renegotiation but finds the Project Company becomes insolvent and the project is back on the Procuring Authority's books to manage.
This decision also requires careful consideration of the costs of alternatives, which should be informed by public sector benchmarking and assessment of market conditions. Benchmarking with respect to scope changes is detailed in Section 3.5 (Claims).
The success of the project may be the main goal of the Procuring Authority and so, if the Project Company proves that the feasibility of the project depends on the revision of the contract, a renegotiation will be more likely to be considered as appropriate. In some examples, changes appear to have been accepted by the Procuring Authority to ensure the project remains viable. However, where changes are accepted to ensure the viability of a project, this might send the wrong signal into the market, in particular, if it changes the risk allocation.
The outcomes of renegotiations in the collected data suggest that several projects were facing financial challenges and that the outcomes were agreed to preserve the public interest in the project.