Given the large asset size and long life (between 10 to 50 years) of public-private-partnership (PPP) contracts, the stakes are enormous for all parties.
It is necessary that these contracts are sustainable throughout the life cycle of the infra project. To this end government and the private participant must make clear assessment of all risks and variables, which could adversely affect the project through the life cycle of the contract. However given the long horizon - at the time of entering into a contract - the parties cannot foresee all changes or risks in the future, which could disturb the equitable allocation of risks and rewards between the parties.
Generally model concession agreements are inflexible, and do not allow for any change of contractual terms, except for change of law or force majeure. In the absence of any specific mechanism for renegotiation, it is likely that these contracts will land up in costly dispute and do more harm to the public than good. To ensure sustainability of the infra projects it is important to develop both contractual and regulatory mechanisms to objectively address any change which materially alters the allocation of risks and rewards.
Any renegotiation provision needs to be carefully tailored, and should not encourage opportunistic behaviour by private participants, putting the entire project at risk.
In certain countries - the UK, Australia, Chile and South Africa - there is a well-defined regulatory mechanism to address any material change which affects equitable allocation of risks and rewards in the PPP contracts. For instance, Chile effectively uses an independent expert technical panel to resolve such renegotiation.
To stem any conflict of interest and bring in objectivity, two different agencies are involved to manage the process of negotiations and approval of material amendment. Also, a periodic and structured process should be devised to conduct any amendment based on: causation and fault, financial costs, alteration in risks, materiality and pros and cons of public economic benefit.
Recently several project developers walked out of PPP contracts because the project risks ran amok. Due to absence of any renegotiation provision, the government was restrained from amending these contracts.
This creates systemic risks - large public bank debt turns into NPA, equity gets locked up in bad assets, and investor's confidence dips in infra projects.