Endogenous determinants for renegotiating concessions: evidence from local infrastuctures

Abstract

There is a global trend for local governments to engage in public‐private partnerships (PPPs) to provide infrastructures and public services. Light rails, water systems, waste management, schools, sport centres, social housing, are just a few examples of sectors where the private sector is becoming more actively involved with local authorities. Most of these engagements are done through mixed companies and contractual concessions. Both suffer from a major shortcoming – renegotiations. Contracts are often renegotiated within few years after signature, and some evidence show that the results might not protect the public interest. This paper tries to understand how and why renegotiations of local concessions happen by looking at the specific characteristics of contracts (endogenous determinants). To illustrate the discussion, a case study from 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 poor design of these clauses can allow for opportunistic behaviour by concessionaires.