Endogenous Determinants for Renegotiating Concessions: Evidence from Local Infrastructure

The engagement of local government in public–private partnerships (PPPs) for the provision of infrastructure and public services is a global trend. Light rail services, water systems, waste management systems, schools, sport centres and social housing are simply a few examples of sectors in which the private sector is becoming more actively involved with local authorities. Most of these engagements are conducted through the use of mixed companies and contractual concessions. However, both of these uses suffer from a major shortcoming – renegotiations. Contracts are often renegotiated within a few years of being signed, and some evidence reveals that the results might not protect the public interest. This article aims to understand how and why renegotiations of local concessions occur by examining the specific characteristics of contracts (endogenous determinants). To illustrate the discussion, a case study of a light rail system is analysed, exemplifying the effect of a contractual renegotiation. The authors argue that contractual renegotiation can be useful in decreasing contract incompleteness, but a poorly designed contractual clause can allow for opportunistic concessionaire behaviour. KEY WORDS: Concessionsrenegotiationspublic infrastructurelocal governmentlight rail services Acknowledgements This article was written when Carlos Oliveira Cruz was a Visiting Scholar at the J.F. Kennedy School of Government at Harvard University. The authors would like to thank Professor José A. Goméz-Ibañez (Harvard University) for his recommendations and comments on the drafts he patiently read. The usual disclaimers apply and any mistakes should be attributed only to the authors. Notes 1. The construction of large infrastructure systems, such as highways, metro systems, water supply systems, oil and gas pipelines, airports and hospitals, among others, is exposed to a great deal of risk in terms of duration, costs and quality control (see more in Skamris and Flyvbjerg Citation1997, Flyvbjerg et al. 2004).