When faced with a renegotiation, the Procuring Authority should ensure that it has adequate capacity and information to carry out the negotiations. This requires a good understanding of the contractual arrangements, and adequate reporting and measurement systems for tracking the progress of the project.
PPP contracts are complex arrangements and external advisors will typically be needed to make the correct decisions. Engaging external advisors is detailed in Chapter 2 (Contract management team set-up and training). Resourcing and preparation for the renegotiation needs to be on a similar level as the original negotiations in the tender process. The Project Company will often employ specialists, bringing experience from a wide range of projects for these purposes, and the Procuring Authority should aim to match that level of experience.
The Procuring Authority's analysis should involve a prudent combination of advice: commercial, financial, legal and technical. Each stakeholder or advisor may bring a different perspective to the proposed renegotiation and the Procuring Authority's position (and confidence to negotiate) will typically improve dramatically when a combined analysis of this nature is carried out.
A key consideration is the potential impact that a renegotiation will have on the risk allocation agreed between the parties at financial close. The allocation of project risks between parties is normally carefully developed, negotiated and agreed in the PPP contract and the aim should be for this allocation to be maintained through any renegotiation, though it may have to be adjusted if there are significant changes. For guidance on typical risk allocation arrangements between the Procuring Authority and the Project Company, see the GI Hub's PPP Risk Allocation Tool.2
This decision also requires a careful cost assessment of the proposed renegotiated solution, 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 termination payment can also act as the reference price in a renegotiation.
Renegotiations in PPP contracts that are poorly carried out can be very costly for the Procuring Authority (with adverse impacts on taxpayers), for end users of the services, for other government institutions, or all the above, as they have the potential to drastically change what was agreed to at financial close.
In some jurisdictions, advisors are available at the bidding stage to assist with negotiation (e.g. through a project preparation facility). However, such funds for advisors are typically no longer available when circumstances arise that require a renegotiation. This can cause issues particularly where the Project Company is well resourced for the renegotiation. This is an area where development banks can take a role in particular markets.
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2 Available at http://ppp-risk.gihub.org.