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Strategy Delivery and Commissioning

78.5. Amendments and Renegotiation of PPP Contracts

Managing the changing environment and emerging risks through amending and adapting contracts is key to de-stressing projects. As such, there are very few, if any, absolute prohibitions on amendment of PPP agreements in any jurisdiction with significant PPP projects. The European Union (EU) has one of the most regulated procurement environments and may be taken as a reasonable representative of good practice on the subject of renegotiation of concession agreements.

While some renegotiations are efficient, many are opportunistic and should be discouraged. Renegotiations of significant aspects of the PPP are in principle forbidden under EU law.[25] It cites the following reasons for discouraging renegotiation.

· Competitive bidding may be distorted and the most likely winner is not the most efficient company, but the one most skilled in renegotiation.

· With renegotiations carried out bilaterally, the positive effects of competitive pressure are lost.

· Renegotiations often reduce the overall economic benefits of PPP arrangements and might have a negative impact.

· It may interfere in lender rights to intervene in or prevent changes to the contracts in order to protect their rights.

However, a closer look at EU procurement law and in particular the 2014 Directive on the Award of Concession Contracts is highly illuminating. Article 43 explicitly permits the modification of a concession contract in any of the circumstances where the value of the concession is not increased by more than 50 percent, as well as in the following cases:

· The modifications, irrespective of their monetary value, have been provided for in the initial concession documents in clear, precise, and unequivocal review clauses and do not alter the overall nature of the concession.

· Additional works or services by the original private partner are necessary and cannot be provided by a new private partner for valid economic and technical reasons, and procurement of a new private partner would impose “significant inconvenience or substantial duplication of costs” on the procuring authority.

· The modifications, irrespective of their value, are not substantial.

In Chile, the Concessions Law of 2010 made some substantial changes to the manner in which Chilean concessions are amended. These are outlined in box 7.7.

BOX 7.7: Amendments to Concessions under Chile’s Concession Law of 2010

The Concession Law allows the parties to agree to change the works and services contracted in order to raise the service levels and technical standards by up to 15 percent (which figure is established in the bidding conditions) of the approved capital value. If there is no cost to the government, then no agreement is necessary.

Where conditions subsequent to the signing of the contract require additional investment by the private partner, the government and the private partner may increase the additional investment value by 20 percent in terms of an amendment agreement that is also approved by the Ministry of Finance. The Ministry of Public Works must be able to justify the changes for duly substantiated reasons of public interest in a public report.

To prevent monopolistic pricing, if the increase exceeds 5 percent of the approved capital works, it must be put out to open tender by the private partner. The private partner is then compensated by one or a combination of subsidies provided by the state: a voluntary payment made directly to the concession holder by third parties interested in the development of the works, a modification to the current amount of the concession total revenues, a change in the concession term period, modification to the rates, or any other factor of the concession’s agreed upon economic regime.

In exceptional circumstances and only in the Construction Phase in which variation exceeds 25 percent of the capital budget, the amendment agreement must be approved by the Ministry of Public Works and the Ministry of Finance. Conditions for the amendment include that the facts and circumstances giving rise to the amendment occur after the awarding of the concession, and could not have been foreseen upon its awarding and that — for reasons including expertise, behaviour, performance, social and environmental impacts, management economies or economies of scale — awarding the new works to the original concession holder is more efficient than granting a new concession.

The technical panel established in the amended Concessions Law, and comprised of independent experts, must verify that these conditions are met by the amendment. The compensation to the private partner is calculated and paid in such a way as to get the net present value of the additional project to equal zero, taking into account the applicable discount rate and the economic effect the additional project may have on the original project, including the higher risk that may occur.

 

[25] European PPP Expertise Centre (EPEC). (2014), Managing PPPs during their Contract Life – Guidance for Sound Management.

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