Module 18: Managing PPPs

18.4. Renegotiation

The public-private partnership process does not end when the private partner is chosen and all the relevant papers are signed. It is not possible for a contract to handle all the uncertainties that the future holds. Thus, careful provision must be made to deal with unexpected events over the life of the contract.

For short-term contracts, renegotiation would seem to be unnecessary provided adequate and automatic safeguard procedures for changes in conditions have been built into the contract. However, in the real world governments change and the new people in power may be dissatisfied with the initial contract terms. Thus, it is prudent to specify renegotiation procedures clearly and to allow independent arbitration if necessary.

In addition, the contract could require amendments if the legitimate needs of the users of the service are not satisfied within the agreed boundaries of the contract.

Even more critical, however, is the presence of a renegotiation statement in the medium- and long-term contracts that constitute the majority of PPP projects. The poorer the quality of information from the start, and the greater the doubts of both parties about their relationship, the better will be the chance that renegotiations will have to occur. Therefore, it is important to introduce clear provisions for renegotiation and to supplement competition at the bidding stage with future competitive pressures.

However, before there is a need for a contract renegotiation, it would be wise to try resolving some of the problems within the present contract terms and conditions. If this does not appear feasible/possible, a PPP Review Panel could be established. This is an independent body that all parties would respect, which could be consulted to resolve issues. The panel would be consulted before resorting to arbitration or other legal measures that could take years to decide, during which time the PPP would almost certainly fail [see Tool 19].

Elements of the contract on renegotiation

The service provider and the municipality should have the right to renegotiate and the ability to do so if special circumstances arise, such as if revenues are substantially off target (either too low to cover costs, or too high and generating too much profit), or if a structural problem (such as a problem with the underground water supply) is discovered by the provider, which was not considered in the original bid. In such cases, both the public and private parties should follow the mechanisms to request renegotiation and to renegotiate and settle the issue as described in the contract.

Renegotiation should be covered as part of the contractual arrangements, with clear statements about the following:

• The conditions under which adjustment of terms or renegotiation may occur.

• Who can request renegotiation of the contract?

• How often can renegotiation occur?

• What extensions to the contract – such as adding treatment works or a new service district – allow or require re-tendering the contract?

• What is the process by which renegotiation must be initiated and conducted?

• What are the procedures to be followed, and the organisations or individuals to be appealed to in the event that the parties to the contract cannot agree on how to resolve an issue (arbitration provisions).

In most cases where problems have arisen in PPP arrangements in the past, contractual difficulties have been worked out through adjustment or renegotiation of key contract terms. Such renegotiation requires good faith on the part of both the government and the private operator. Where a good working relationship and collaborative spirit are lacking, on the other hand, or where political motivations prevent governments from negotiating, contract termination is the result of such problems.

Termination of the contract is not beneficial to either of the parties, unless the new, renegotiated terms were entirely unacceptable. First and foremost, termination means that the process has to start again from the very beginning; the additional effort required to build new relationships and conduct new negotiations also brings with it additional transaction costs. Thus provision for renegotiation is vital for the implementation of a successful PPP. In order to prevent and mitigate conflicts and subsequent contract termination, conflict resolution skills should be included in the capacity development trainings [Tools 20, 21].

End of Module 18

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