The Renegotiation Trap: Political Economy Factors Driving Opportunistic Contract Modifications in Public-Private Partnerships
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Public-Private Partnerships (PPPs), as an instrument of global infrastructure governance, have created a widespread issue among governments: the widespread renegotiation of PPP contracts. Renegotiations occur at a rate far greater than would be expected under normal circumstances; therefore, it can reasonably be concluded that most PPP renegotiations are opportunistic. This article examines why the renegotiation of PPPs occurs so frequently. The authors call this problem the “Renegotiation Trap,” because there exists a self-reinforcing cycle of political incentives, opportunistic bids, contract incompleteness, and lack of institutional oversight that makes renegotiating PPP contracts both possible and strategically rational. The authors draw upon three bodies of literature to explain why renegotiating PPPs occurs. First, incomplete contract theory is utilized to understand why renegotiating PPPs is necessary. Second, political economy frameworks are used to understand who benefits from the renegotiation of PPPs. Third, data collected from over 1,000 Latin American concession agreements are analyzed to identify when and how renegotiations occurred. Using these three approaches, the authors found that the primary causes of renegotiating PPPs were: (i) election cycles; (ii) soft budget constraints; (iii) bidder’s curse; (iv) information asymmetry; and (v) corruption. The authors also evaluate different reform options to improve the renegotiation process. These reform options include creating an independent regulatory body to oversee the renegotiation process, holding open auctions to determine the best price for services, requiring public disclosure of renegotiated terms, and providing additional funding sources for renegotiation. The authors conclude that improving the renegotiation process requires changing the political structure that provides the incentives for renegotiating PPP contracts rather than just changing the language contained within those contracts.
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