12 Negotiating and Renegotiating PPPs and Concessions

Ana Corbacho, Katja Funke, and Gerd Schwartz
Published Date:
July 2008
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Luis A. Andres and J. Luis Guasch1 

Infrastructure remains a critical factor in sustaining economic growth and poverty alleviation in developing countries. The needs and required investment levels are significantly large (Fay and Morrison, 2006). Developing countries have turned to the private sector to finance and operate infrastructure services, seeking investment and expertise in order to accelerate improvements in levels and quality of service. Private participation has often been preceded by sector restructuring and by new laws and regulations. Such efforts were intended to protect investors from politically motivated government intervention, to shield users from the abuse of monopoly or dominant positions by new private operators (since many infrastructure services have components of natural monopolies), and to ensure competition between new entrants and dominant incumbent operators when feasible.

Required investments are often highly specific sunk costs that may tempt governments to behave opportunistically, taking regulatory actions that expropriate rents once costs are sunk, such as compulsory or unilateral renegotiations of agreed contract terms. Aware of such pitfalls, investors may require an additional premium (higher tariffs, smaller transfer fees) to account for such risk. Depending on the country and sector, such regulatory risks can add 2–6 percentage points to the cost of capital (Guasch and Spiller, 2001). Higher tariffs and lower transfer fees or sale prices are then needed to cover these higher costs. A 5 percentage point increase in the cost of capital to account for regulatory risks will reduce an offered transfer fee or sale price by 35 percent, or require a 20 percent increase in tariffs. For example, in the water concession of a Latin American city, the regulator grants a 3.5 percent increase in tariffs for each 1 percentage point increase in the cost of capital.

But not only governments may behave opportunistically. Once a private enterprise has been granted an infrastructure concession, it may be able to “hold up” the government—for example, by insisting on renegotiating the contract, seeking more favorable terms, or through regulatory capture. The extensive information advantages that an enterprise has over government (as well as, in most cases, over other potential operators) and perceived leverage in negotiations can provide the enterprise with strong incentives to renegotiate a contract and secure a better deal than the original bid. The resulting regulatory arrangements may be less effective in protecting customers from monopoly abuses. Thus, the design of regulations, concession and privatization contracts, and implementation agreements can significantly affect sector performance and the incidence of renegotiation.

For private sector participation to be successful and achieve the desired objectives, contracts and regulations need to be appropriately designed and enforced. The key objective should be to ensure that the contracting parties comply with the agreed conditions. Thus, barring major unforeseen events and contingencies (which can be spelled out in the contract), the key issue is to increase the likelihood that the signatory parties to a concession contract, as well as the private sector operator and the government, comply with the terms of the contract, and that opportunistic renegotiation by either party is dissuaded. A key starting point is the design of better contracts that, while seeking long-term sector efficiency, do not facilitate renegotiation and penalize non-compliance.

Yet the experience with private participation in infrastructure in a number of countries, and particularly in Latin America, has raised concerns and a backlash from the population in those countries. As countries revisit their strategies toward a new wave of projects, it is essential that the lessons of the past are addressed to make the new programs and the financing successful.

Hence, the objective of this chapter is to examine Latin America’s experience with public-private partnerships (PPPs) by analyzing the impacts of infrastructure privatizations and concessions from the late 1980s to the early 2000s. Special focus will be placed on the impact of regulatory and contract design decisions. The first section will describe private sector participation in infrastructure in the region. The next will depict different methodologies used for measuring the impacts of PPPs in this sector. The following section will analyze the impact of private sector participation on sector performance. Then the contract designs, regulation, and renegotiation of the concessions will be analyzed. An exploration follows of the differences between the public perception of PPP programs and the reality. The final section will conclude with the lessons learned.

PPPs in infrastructure

PPPs in infrastructure were one of the key components in the structural reforms carried out by most Latin American countries in the 1990s. The motivation behind attracting the private sector came from a better understanding of the impact of infrastructure on economic growth and poverty, the urgent necessities of investment in that sector, and the shortage of public financing.

Latin America used a variety of organizational forms for private participation in infrastructure. Overall concessions were the salient mode of private sector participation, particularly for the transport and water and sanitation sectors, with build-own-operate (BOO) or build-operate-transfer (BOT) schemes used for greenfield projects, while outright sale was generally used in the privatization of transport operators, such as airlines. Privatization or outright sale was generally used in telecommunications and electricity generation. Overall, concessions accounted for more than 70 percent of the projects or transactions.

The choice of concessions/PPPs over privatizations was driven by legal or constitutional impediments to privatization, including the definition of state assets or a prevailing view that certain activities or infrastructure were of such strategic importance that they must remain in public ownership (although not necessarily in public operation or management). Since these facilities or services were imbued with a high degree of public interest and visibility, the social and political impact of outright privatization was sometimes seen as unacceptable. Here we use the terms “concessions” and “PPP” interchangeably, since conceptually they are about the same. Some countries do, however, distinguish between them by labeling concessions as those projects that are fully financially viable, not needing government financing or credit enhancement, while they label PPPs as those projects that are not financially viable and require government financial contributions or credit enhancement. For the treasury this distinction might make a difference since the latter implies increased future indebtedness, while the former does not increase levels of country indebtedness. Another difference is the source of revenue risk. While in the former the source of revenues is the users, through fees or tolls, in the latter the revenues—at least partially—come from government payments.

The concessioning of infrastructure required a host of complementary activities. Sector restructuring was almost always required. This generally took two forms. First, putting the sector on a commercial basis frequently required a change in organizational status. For example, airport concessions typically required transfer from the transport ministry to public enterprise status. Second, sector reforms also frequently required the unbundling of activities—vertical and horizontal—such as the separation of port terminals and of activities at ports, or the separation of airport services from air navigation activities, or the geographical breakdown of the railroad network, or separation of track jurisdiction from railway service operations.

Given the (quasi-) natural monopoly of a number of the segment operations in the infrastructure subsectors, the transfer from public to private status or participation also required a new system of regulatory oversight, including new legal instruments, organizations, and, most importantly, a shift in perspective from the “government as owner-operator” to the “government as a monitor-regulator and enabler.” In addition, complementary reforms often were needed in the areas of contract law with regard to concessions, competition policy, and labor and social welfare policy.

The most relevant aspect of the differences between concessions/PPPs and privatizations relates to the degree of residual control or influence retained by the government. Concessions do not transfer property or physical assets, but rather a right to their use, typically for a fixed period of time, in contrast to privatizations, where property is transferred and for an unlimited period. Thus the only asset a concession has is the right to the cash flows of the payment of service. Concessions/PPPs frequently involve more extensive obligations and contain provisions for termination or cancellation.

This residual role has important implications for the performance of concessions. Incentive issues are preeminent; extensive clauses are needed describing rights and responsibilities of both the government and the concessionaire. These concessions are typically large and long-lasting projects, in highly sensitive sectors providing essential services. As a result, tariff levels are highly politicized. In addition, characteristics such as large assets and sunk costs of transport infrastructure create “stranded assets” that provide incentives for opportunistic government actions. On the other hand, the importance of the facilities means there is continuing pressure for subsidies or guarantees. Financially, the fact that the assets remain as government property makes them unusable as collateral for loans or guarantees. The long lives and amortization periods and typically short tenor of available domestic debt instruments have led to extensive foreign currency financing, but with services that are largely consumed (and frequently paid for) in domestic currency, leading to significant foreign exchange risks. All this adds complexity to the design of the transactions and increases the risks of concessions relative to privatizations, thus raising the costs of financing. Finally, the fiscal implications of concessions/PPPs have to be considered. Often concessions and PPPs commit governments to a stream of future payments or to a number of guarantees. Care has to be exercised that those commitments and possible contingent liabilities are in line with sound country macroeconomic management and indebtedness capacity.

Overall, in terms of private participation, these programs were a success. Wherever the private sector was summoned, it participated. There were few private participation programs abandoned owing to lack of interest. Private infrastructure spending did increase after the infrastructure sectors were opened up to private participation, but it did so unevenly across sectors and countries. Most successful were telecommunications and electricity, with water and transport lagging behind. Figures 12.1a, 12.1b, and 12.1c use shading to depict the percentage of total households in each Latin American country that were served by private companies in 1990 and 2003. In electricity distribution, only 3 percent of households in the region were served by a private company in 1990, all of which were in Chile. In contrast, this number exceeded 60 percent in 2003 (Figure 12.1a). Fixed telecommunications saw even more dramatic changes: the percentage of households served by the private sector leapt from 3 percent in 1990 to over 86 percent in 2003 (Figure 12.1b). In water distribution, virtually no households were served by the private sector in 1990, while over 11 percent were in 2003 (Figure 12.1c). The results of private participation have been generally positive, as shown below, with the exception of some shortcomings.

Figure 12.1aEvolution of private participation in electricity distribution

Figure 12.1bEvolution of private participation in fixed telecommunications

Figure 12.1cEvolution of private participation in water distribution

In spite of these results, beginning in 2000, some concerns about the validity of the economic model and its support for the private services in infrastructure began to arise. And herein lies a paradox. On the one hand, an increasing amount of analytical evidence shows and suggests that private participation has had an important positive impact in the performance of the company and in the well-being of consumers, while it has not had significant adverse impacts on poverty and inequality. On the other hand, in spite of this evidence, public opinion has turned against privatization, unleashing great social discomfort in response to a number of recent attempts to privatize. In the same way, several Latin American countries have opposed continuing with programs of private participation in infrastructure, but have left the door open to alternatives such as public-private associations. In order to move forward, it is imperative that the new initiatives address the existing concerns.

Measuring the impact of PPPs in infrastructure

To date, an abundant sample of economic studies indicates that the privatization program of Latin America has produced highly positive results. Among the general studies of impact are those of Boardman and Vining (1989), Megginson and others (1994), Megginson and Netter (2001), and Chong and López-de-Silanes (2003). There are few specific studies for Latin America, and the majority are studies of cases in the telecommunications sector. For example, Ros and Banerjee (2000) analyze 23 countries in the region evaluating the relation between privatization and the expansion of the network, coverage, and efficiency in telecommunications. Wallsten (2001) analyzes the impact of competition in the telecommunications sector and Ramamurti (1996) analyzes the privatization of telecommunications and transport in Mexico, Argentina, Jamaica, and Venezuela. Finally, La Porta and López-de-Silanes (1999) evaluate the privatization of non-financial companies in Mexico.

The most complete and exhaustive study has been carried out by Andres and others (2008), where the performance of private participation in infrastructure is measured along the following parameters: number of subscribers, output, coverage, employment, labor productivity, distributional losses, and prices. That study used data at the company level in most Latin American countries, between 1990 and 2004. Using time-series data, various performance indicators were constructed to evaluate the impact of reforms before and after private participation.

Some empirical studies that measure the impact of privatization on company performance measure the situation before and after private participation without correcting for firm-specific time trends. Although this methodology can make sense in the case of indicators, such as profitability and prices, it can lead to false interpretations in the case of other indicators, where trends matter, such as number of connections to the service and labor productivity. Because of such cases, it is important to control for trends, a key feature of the Andres and others (2008) study. For example, if the evidence shows that there are changes in labor productivity from before to after private participation, but such changes conform to the trend, the conclusion is that private participation had no impact. In this study, the analysis was separated into three periods, as shown in Figure 12.2. The first covers the period before private participation was announced (in general, one year before the privatization itself), the second covers the period during the transition, from the announcement of privatization to a year after privatization, and the third period comprises the stage after the transition. Figure 12.2 illustrates an example of the number of connections where the trend temporarily increases during the transition, but then falls back to its pre-transition growth rate.

Figure 12.2Controlling for time trends: an illustration


In the Andres and others (2008) analysis, two datasets were merged to create a holistic analysis of infrastructure privatization. The first dataset comprises performance indicators for 181 firms in electricity distribution, telecommunications, and water distribution. These data were then matched to a second dataset containing details of privatization contract characteristics and the regulatory framework for nearly a thousand infrastructure projects awarded in Latin American and Caribbean countries from 1989 to 2002 (see Guasch, 2004).

Empirical approaches

Andres and others (2008) use three empirical approaches: (i) a means and medians analysis with the performance indicators; (ii) an econometric analysis with the performance indicators; and (iii) an econometric analysis that merges the performance variables with the regulatory and contract variables. The reason for using multiple approaches is to zero in on the true impacts of private participation in infrastructure. In the absence of a control group of comparable firms, the approaches all try to estimate the counterfactual—what would have presumably happened in the absence of the privatization or regulatory decision—using what is known from before, during, and after the privatization process of each firm.

Means and medians analysis

This approach compares means and medians of the different variables across the three periods: pre-privatization (pre-transition), transition, and post-privatization (post-transition).2 First, changes in the levels of the different variables were analyzed. After normalizing the series, the average change in levels between each period was computed. Statistical tests were then used to determine whether or not the differences in means and medians between (i) the pre-privatization and transition periods and (ii) the transition and post-transition periods were statistically significant. Second, changes in average growth of the variables were measured using the same methodology that was used to analyze the change in levels described above.

Econometric analysis

A second approach using regression analysis is used to complement the means and medians analysis results. In this approach, privatization can be thought of as a treatment; and the regression is designed to isolate the effects of the treatment, similar to a drug trial in medicine. In econometric terms, the regression includes dummy variables for the transition and post-transition periods. After controlling for other relevant factors within the regression, the significance of the dummy variables is tested to determine whether or not the treatment has had a demonstrable effect. The size of the coefficient on the dummy variables provides information about the size of the impact. This approach accounts for firm-level fixed effects that are not observable to the econometrician, such as management quality, initial conditions, size, density of the network, and so forth. It does so by assuming that these variables are constant for each firm over time; hence they can be isolated from the privatization effects within the regression. Multiple econometric models were also run to account for firm-specific time trends and to use growth rates as the dependent variable, rather than levels.

Econometric analysis with regulatory and contract variables

A second part of the econometric analysis incorporated the contract and regulatory characteristics described above. Specifically, dummies were built for each of the variables interacted with the transition and post-transition dummies described above. Similar to the first part of the econometric analysis, regression models were run with and without firm-specific time trends. Owing to a lack of variation across some of the contract and regulatory characteristics, observations from the three sectors—electricity, telecom, and water—were pooled to achieve more robust results.

Impact evaluations in electricity, telecommunications, and water

The analysis of Andres and others (2008) shows substantial performance improvements by private sector participation in terms of efficiency, quality of service, and productivity, with substantial improvements in coverage in the telecommunications sector, where most of the countries have experienced three-to five-fold increases in cellular telephone usage. Evidence from other studies suggests that in the transport sector, there have been positive gains in ports and railroads, but more modest improvements in airports. The evaluation of improvements in highways is more complicated since, although a great number of new highways were built, the cost-benefit analysis is unclear.

The overall effects are shown in Table 12.1. The arrows show the direction and magnitude of the changes caused by the private sector participation in each sector, based on a combination of the means and medians analysis and the econometric analysis. It should be noted that the results reported for the output, coverage, and labor productivity indicators are adjusted to control for time trends. If time trends were not controlled for, each of these indicators would show significant increases. The reasoning is that a natural increase is expected—based on growing trends prior to private participation—for each of these variables, regardless of whether ownership is public or private. For the other variables, a natural trend is not expected; hence the results shown in the table do not incorporate the firm-specific time trend controls.

Table 12.1Summary of impacts on performance variables
Electricity DistributionFixed

Water and Sewerage

Number of connections*==
Labor productivity*
Sector employment=
Distributional losses
Average prices
Monthly service charge
Installation charge
Quality of service

Electricity distribution

The main results are that private participation did not change the growth trend for number of connections, energy sold, and coverage. Employment fell during both periods, but primarily during the transition. Labor productivity growth accelerated during the transition, followed by a deceleration during the post-transition period. Distributional losses and quality improved during both periods. Finally, average prices in real local currency increased somewhat over both periods, while results for dollar price changes were less robust given Brazil’s currency devaluation in 1999.


Private participation generally increased output and coverage, even after controlling for firm-specific time trends. Employment fell and labor productivity increased during the transition and post-transition periods, while efficiency (percentage of complete calls) improved during the post-transition period. Prices showed mixed results: the price of a local call increased during the transition; residential monthly charges increased in both periods; and installation charges decreased in both periods. Finally, quality—as measured by network digitization—generally improved.

Water and sewerage

Output and coverage measures improved, but the improvements were consistent with the existing trend. Meanwhile, the number of employees dropped substantially during the last years under public management. These changes significantly increased labor productivity, especially during the transition period, but when looking at growth rates, labor productivity rates accelerated during the transition and decelerated in the post-transition period. Efficiency—measured by distributional losses—improved mainly after the transition. Price increases were seen in both water and sewerage, although the increases for sewerage were generally not robust owing to a small sample size. Two measures were used for quality: the continuity of the water service and the number of water samples that passed a potability test. Both measures improved in both periods, but potability improvements occurred mainly during the transition.

An interesting element to be noted is that while employment did decrease, on average, with private participation, sector employment actually increased in the post-transition period, owing mostly to the entry of related firms and subcontracting by the providers. This is worth noting since a recurring criticism of private sector participation addresses the reduction of employment. While, on average, this is true at the firm level, it is not the case at the sector level, where after two or three years we observe overall employment increases.

Fiscal impact

The decade of the 1990s attracted US$290 billion in private capital investments in infrastructure in Latin America, representing about half of the flows of the private capital in the world destined to infrastructure during this period. Nearly 60 percent of these resources, or US$174 billion, was allocated to the state (treasury) for sales to the private sector, a sum equivalent to 40 percent of the debt stock of the public sector of the region in 1990, contributing significantly to the improvement of public sector finance (Figure 12.3). It was like an unexpected windfall. How it was spent is a different story. Public sector finance also benefited from the recurrent benefits effect (in many cases even more than from the unexpected earnings) reflected in the elimination of recurrent subsidies and the creation of new tax earnings.

Figure 12.3Fiscal capture of benefits, in 1999 US$ billions

Impact on consumers

With regard to new consumers, the initial access entails major positive welfare effects. In relation to the existing consumers, the welfare effect also appears positive owing to better quality of service. While the price effect on those consumers was mixed (tariffs increased in some countries and sectors while they diminished in others), the quality of service improved significantly and this appears to more than compensate for the increases in tariffs. But perhaps the most dramatic effects are seen in the impact on new consumers. For example, in a recent study in Peru, Escobal and Torero (2004) analyzed the impact on household earnings due to access to services, and the numbers are quite significant as seen in Figures 12.4a and 12.4b. Having access to water and electricity increases earnings by 13 percent; having access to water, electricity, and sanitation increases earnings by 23 percent; having access to water electricity, sanitation, and telecom increases earnings by 36 percent; and having market access through rehabilitated roads increases earnings by 35 percent.

Figure 12.4aIncrease in household earnings from access to infrastructure public services

Figure 12.4bIncrease in household earnings from access to market through rehabilitated rural roads, in annual US$

Source: INEI (2006).

Contract design, regulation, and renegotiation

The results above show that there were overall significant gains from the PPP programs and that efficiency gains from PPPs can be large, but results do depend on proper concession design and over sight/regulation. In fact, the benefits and gains of the PPP programs could have been and would be much larger if the process, design, and incentives had been better. Learning and incorporating the lessons from the last 20 years of PPPs and concessions experience is a major point in moving forward.

There are many reasons to suspect that characteristics of the privatization process and regulatory environment would affect firm performance both during and after the transition to private ownership. First, large unexplained differences in performance across firms were found in the Andres and others (2008) analysis discussed above. For example, large drops in employment occurred on average during both the transition and post-transition periods in the electricity sector. However, some firms experienced much larger drops than others. These large performance differences suggest that differences in privatization procedures or the regulatory environment may have played a significant role.

Further evidence comes from studies of privatizations in Mexico and Central Europe. López-de-Silanes (1997) showed that the prices of Mexican privatizations could be influenced by the type of auction mechanism as well as by the implementation and timing. Analyzing transition economies in Central Europe, Frydman and others (1999) found that ownership changes had significant beneficial effects in those cases where the buyer was an outsider, while the effect was not significant when the buyers were insiders. This result suggested that the effects of transferring ownership to insiders and outsiders may have important implications in the design and effectiveness of privatization programs in transition economies.

The findings of Andres and others’ (2008) empirical approach—that is, the econometric analysis with regulatory and contract variables—can be summarized in three main points. First, regulatory and contract characteristics matter: the way privatizations are undertaken can generate significant performance differences. Second, each regulatory and contract characteristic affects each performance variable differently. In other words, a certain contract characteristic could have a positive influence on one performance variable while having a negative or insignificant impact on another. Third, some regulatory and contract variables have bigger impacts than others. For instance, in some cases the changes attributed to having a fully autonomous regulatory body are much larger than changes attributed to other regulatory variables.

It is also critical to watch out for renegotiation of private participation contracts and terms. If not controlled, renegotiation can be the norm rather than the exception. Renegotiation can reduce the potential efficiency gains and benefits of PPPs and shift the appropriations to the PPP operator. Efficiency gains and benefits from PPPs can be significantly larger if appropriate contract and regulatory designs are in place and renegotiations are dissuaded and controlled. The rest of this section discusses evidence, impact, and lessons on the issue of renegotiations, and how that can be addressed through improved PPP design.


Perhaps the biggest problem with concessions has been the high incidence of contract renegotiation shortly after they are awarded. Usually, concessions are granted through an auction. The competitive nature of the auction is supposed to dissipate rents and select the most efficient operator. But if concessions are renegotiated shortly after their award, as often happens, the initial bidding or auction turns into a bilateral negotiation between the winning operator and the government—undermining the competitive discipline and benefits of the auction. At that stage, the operator has significant leverage to secure additional benefits because the government is often unable to reject renegotiations and is usually unwilling to claim failure—and let the operator abandon the concession—for fear of political backlash and additional transaction costs. By embarking on renegotiations, the operator can undermine all the benefits of the bidding- or auction-led competitive process. And if bidders expect easy renegotiations, the auction might result in the selection of those who are the most skilled at renegotiation rather than the most efficient operators. Renegotiations can have a large impact on who appropriates the large efficiency gains from private participation in infrastructure. Renegotiation implies a lack of compliance with agreed-upon terms and departures from expected promises of sector improvements. On average, the outcome of renegotiations adversely affected the users.

Renegotiation has occurred if a concession contract has undergone a significant change or amendment not envisioned or driven by stated contingencies in any of the following areas: tariffs, investment plans and levels, exclusivity rights, guarantees, lump-sum payments or annual fees, coverage targets, service standards, and concession periods. Standard scheduled tariff adjustments and periodic tariff reviews, as stated in the contract, are not considered renegotiations.

To illustrate the problematic of renegotiation of concessions, this subsection presents a number of key summary statistics from the Guasch (2004) dataset of more than 1,000 concessions granted in the Latin American and Caribbean region during 1985–2000.

Incidence of renegotiation

Excluding the concessions in the telecommunications sector, because practically all telecommunications projects were privatized rather than concessioned, 51 percent of all concessions/PPPs awarded in Latin America and the Caribbean from the late 1980s to 2005 have been renegotiated (Table 12.2). Renegotiation was especially common in transportation concessions, occurring in 65 percent of concessions, and even more so in water and sanitation concessions, occurring in 81 percent of concessions.

Table 12.2Renegotiation incidence and average time until renegotiation, 1988–2001
Renegotiated Concessions

(in percent)
Average Years from Award

until Renegotiation
All sectors512.1
Water and sanitation811.7
Source: Guasch (2004), with updated numbers.

Renegotiation was far less common in telecommunications and energy, to some extent as a result of the more competitive nature of these sectors. That competitive nature significantly reduces the leverage of concessionaires and bargaining power for renegotiations. In most cases, telecommunications and energy concessionaires are not the only service providers, so governments have more options for securing these services from other operators in the event of a threat by operators to abandon the concessions if renegotiation demands are not met.

Also quite striking is the short time from award to renegotiation. While most concessions were awarded for 20–30 years, most renegotiated concessions underwent renegotiation very soon after their award, with an average of just 2.1 years between concession awards and renegotiations. Renegotiations came most quickly in water and sanitation concessions, occurring an average 1.7 years after concession awards. Renegotiations of transportation concessions occurred after an average of 3.1 years, perhaps reflecting the sector’s longer construction times. Moreover, the variance in the distribution of renegotiation periods was small, with 85 percent of renegotiations occurring within four years of concession awards and 60 percent occurring within three years—for concessions that were supposed to run for 15–30 years.

Contract award

Most of the concessions/PPPs in the Guasch (2004) sample—78 percent of them—were awarded through competitive bidding rather than through direct adjudication and bilateral negotiation (Table 12.3).

Table 12.3Contract award processes for concessions in Latin America and the Caribbean by sector, mid-1980s to 2000
Award ProcessTelecomEnergyTransportWater and


of Total
Competitive bidding2459523112569678
Direct adjudication
(bilateral negotiation)1514337419922
Source: Guasch (2004).

An interesting empirical regularity from the data collected that provides additional support to the capture and rent-seeking thesis is the low incidence of renegotiation on concessions granted not through competitive bidding but through direct adjudication or bilateral negotiation between the government and a single operator, as a result of government invitation or operator request. Renegotiation was far less likely in concessions awarded non-competitively, occurring in just 8 percent of such contracts—compared with 46 percent for contracts awarded through competitive bidding, as seen in Table 12.4. A plausible explanation for that low renegotiation incidence is that any rents to be captured were secured through the initial bilateral negotiation, reducing or eliminating the need for opportunistic operator behavior after the concession is awarded. Moreover, the lack of competition might rule out financially unsustainable bids.

Table 12.4Percentage of concessions renegotiated according to competitive or non-competitive process excluding the telecommunications sector, by type of process
Renegotiation when awarded via competitive bidding46
Renegotiation when awarded via bilateral negotiations8
Source: Guasch (2004).

In contexts where there is a direct adjudication of concession, any renegotiation usually comes from a new administration questioning a “sweet” deal granted by the previous administration, or from the same administration with different priorities. Examples include power purchase agreements with independent power producers and road concessions in a number of countries.

The lower incidence of renegotiation in directly awarded concessions should not be interpreted as an endorsement of that process. To the contrary, it shows that there are problems with that process (rent capture, opportunities for corruption) and indicates that it should not be used.

Initiator of renegotiation

In 61 percent of cases, concessionaires requested renegotiation, and in 26 percent of the cases, the government initiated renegotiation (Table 12.5). In the remaining cases both the concessionaire and the government jointly sought renegotiation. When conditioned by the type of regulatory regime in place, one can see that operators were predominantly and almost exclusively the initiators of renegotiation (83 percent), but under a rate-of-return regime, the government led the request for renegotiation, although with a much lower incidence (34 percent) (Table 12.6). That figure is partially explained by the increased risk to the operator of a price-cap regulatory regime.

Table 12.5Who initiated the renegotiation? (percentage of total requests)
SectorBoth Government and OperatorGovernmentOperator
All sectors132661
Water and sanitation102466
Source: Guasch (2004).
Table 12.6Who initiated the renegotiation conditioned on regulatory regime? (percentage of total requests)
SectorBoth Government and OperatorGovernmentOperator
Price cap11683
Rate of return393426
Hybrid regime302644
Source: Guasch (2004).

Empirical analysis of the determinants of renegotiation

Contract features and the incidence of renegotiation

Renegotiation was far more likely (renegotiation occurred in 60 percent of cases) when concession contract awards were based on the lowest proposed tariff rather than on the highest transfer fee (11 percent) (Table 12.7). Renegotiation was also much more likely when concession contracts contained investment requirements (70 percent) than when they included performance indicators (18 percent). Moreover, the incidence of renegotiation was much higher under price-cap regulation (42 percent) than rate-of-return regulation (13 percent), and when a regulatory agency was not in place (61 percent) than when one was in place (17 percent). Finally, renegotiation was more likely when the regulatory framework was embedded in the contract (40 percent) than when embedded in a decree (28 percent) or a law (17 percent).

Table 12.7Contract features and the incidence of renegotiated concessions in Latin America and the Caribbean, mid-1980s to 2000
FeatureIncidence of Renegotiation (percent)
Award criteria
Lowest tariff60
Highest tariff11
Regulatory criteria
Investment requirements (regulation by means)70
Performance indicators (regulation by objective)18
Regulatory framework
Price cap42
Rate of return13
Existence of regulatory body
Regulatory body in existence17
Regulatory body not in existence61
Impact of legal framework
Regulatory framework embedded in law17
Regulatory framework embedded in decree28
Regulatory framework embedded in contract40
Source: Guasch (2004).

To identify the determinants of renegotiation, the impact of various explanatory variables on the probability of renegotiation was estimated through a probit model specification. The explanatory variables were chosen on the basis of theory and empirical evidence. They were macroeconomic shocks, enforcement quality, financial structure of the concession, extent of competition in the award process, extent of affiliation, tariff adequacy and lock-in effects, legal grounding of regulation, electoral cycles, risk allocations, and reputation and learning by government (for further details see Guasch, 2004; Guasch, Laffont, and Straub, 2003). The main results were that regulations, concession design, and political factors all play an important role.

Regulation matters

As expected, the existence and type of regulation are highly significant in explaining the incidence of renegotiation. Both are proxies for the quality of enforcement, and better enforcement (through a neutral professional institution that can evaluate an operator’s status and claims) should dissuade or reject inappropriate claims for renegotiation. In addition, a stronger legal grounding for regulation (embedded in a law rather than in a decree or contract) lessens the probability of renegotiation and increases the political cost of government-led renegotiation (for further details, see Estache, Guasch, and Trujillo, 2003).

The type of regulation also affects the probability of renegotiation, as the theory predicts, through risk allocation. Rate-of-return regulation lowers the probability of renegotiation because the costs of potential adverse events are borne by government. In contrast, price-cap regulation, where risks are borne by the operator, is more fragile to shocks, such as when adverse events might trigger a demand to renegotiate by an operator seeking to restore financial equilibrium.

Concession design matters

Concession design also matters greatly, especially award criteria and investment obligations. Awarding contracts based on the lowest tariff rather than the highest transfer fee significantly increases the probability of renegotiation. First, tariffs are a weak anchor for a concession. They are subject to constant revisions, and it is unlikely that they will remain unchanged for the duration of a concession using the adjustments agreed upon.

Second, such award criteria impose little lock-in or sunk commitment on operators. Unlike the case of transfer fees, operators have to pay nothing upfront, so their leverage is much stronger, and they can walk out early with little to lose. Finally, minimum tariffs might be viewed as a proxy for tariff adequacy. Their use as award criteria can lead to the bidding of inadequate tariffs and so prompt requests for renegotiation.

Investment obligations also affect renegotiation and increase its probability. These refer to regulating by means as opposed to regulating by objectives. Since the investments need to be evaluated, monitored, and accounted for, there is a permanent conflict in determining what counts as investments (for example, firms often argue that severance payments should count as investments), the amounts of investments, prices paid or transfer fees used, and so on. That leads to protracted negotiations and can lead to renegotiation. In principle, the implications are clear: no investment obligations should be required other than requirements to achieve a number of outcome targets (performance measures). That approach avoids the problem of measuring investment, manipulation of transfer fees, and proper use of investment.

Affiliation and proximity to government matter, and they also increase the probability of renegotiation through a higher possibility of capture and higher success in seeking renegotiation. That might induce risky offers and lead to the selection, not of the most efficient operator, but of the one most skilled in renegotiation or with stronger affiliation.

Macroeconomic factors, especially devaluations, also increase the likelihood of renegotiation. Revenues from infrastructure services are collected in domestic currency, while investments tend to be financed with foreign currency. Thus devaluations alter the financial equilibrium of the operator, leading to appropriate requests for renegotiation.

Political factors matter

Two political factors appear to affect the probability of renegotiation. One is the extent of corruption. If operators believe that their government counterparts are subject to influence, they will be more likely to believe that renegotiations and the capture of additional rents are possible.

The second political factor affecting the probability of renegotiation is the timing of elections. New administrations tend to reconsider actions taken by previous administrations, either because they entertain new priorities and need to change contract terms accordingly, or because of politically motivated objectives. A typical example arises when a new administration belongs to a different political party from the previous one and terminates agreements secured by the previous party in an attempt to undermine it politically. Another example is the election of a new mayor who must grant tariff increases that were agreed to by the previous mayor. The new mayor must suffer the political cost of the tariff increase without having shared in the fiscal benefits of the concession. Many new mayors have refused to grant such increases and have sought renegotiation.

Finally, the policy implications are clear: improving contract design and regulatory framework along the lines here described; holding the bidders accountable for their initial bids; making the costs of opportunistic renegotiation high through much larger performance bonds; committing to a policy of no renegotiation for at least the first quinquennial tariff review; making compensation to operators quite significant in the event of government-led renegotiation; specifying the triggers for renegotiation and guidelines for the process; and establishing a neutral and professional advisory group to evaluate renegotiation demands.

Outcomes of the renegotiation process

The main issues in the renegotiation process were not surprising: tariff adjustments, investment obligations and their schedule, cost components that were to be automatically passed through to tariffs, adjustments of the annual fee—usually based on revenues—paid by the operator to the government, changes in the asset base to impute rate of return, and extension of concession contracts. The common argument used by operators in soliciting the renegotiation of the concession contract was an imbalance in the financial equilibrium of the concession contract because of several factors. By contrast, the main arguments used by governments when requesting a renegotiation of the contract have been changes in government priorities in the sector, political concerns (often linked to the electoral cycle), dissatisfaction with the level and speed of sector development, and non-compliance by operators with agreed-upon terms. Table 12.8 shows the incidence and direction of adjustments of those components in the outcome of renegotiation. Note that, on average, renegotiation tended to favor the operator, securing increases in tariffs (62 percent), delays and decreases in investment obligations (69 percent), increases in the number of cost components with an automatic pass-through to tariffs (59 percent), and decreases in the annual fee paid by the operator to the government (31 percent). A small number of renegotiations, however, led to tariff decreases (19 percent), increases in the annual fee paid by the operator to the government (17 percent), and unfavorable changes for the operator of the asset base (22 percent).

Table 12.8Common outcomes of the renegotiation process
Renegotiation OutcomePercentage of Renegotiated Concession

Contracts with That Outcome
Delays on investment obligations targets69
Acceleration of investment obligations18
Tariff increases62
Tariff decreases19
Increase in the number of cost components
with an automatic pass-through to tariff increases59
Extension of concession period38
Reduction of investment obligations62
Adjustment of canon—annual fee paid by
operator to government
Favorable to operator31
Unfavorable to operator17
Changes in the asset-capital base
Favorable to operator46
Unfavorable to operator22
Source: Guasch (2004).

Renegotiating only when justified

In principle, renegotiation can be a positive instrument when it addresses the inherently incomplete nature of concession contracts. Properly used, renegotiation can enhance welfare. Although some renegotiation is desirable, appropriate, and to be expected, this high incidence exceeds expected and reasonable levels and raises concerns about the validity of the concession model. It might even indicate excessively opportunistic behavior by new operators or by governments. Such behavior undermines the efficiency of the process and overall welfare, because renegotiation takes place between the government and the operator only, so it is not subject to competitive pressures and their associated discipline. When used opportunistically or strategically by an operator or government to secure additional benefits, and not driven by the incompleteness of a contract, renegotiation can undermine the integrity of a concession, reduce welfare, and threaten the desired structural reform program in infrastructure. The high incidence of renegotiation reported here should indeed be a cause of concern.

Renegotiation, particularly opportunistic renegotiation, can reduce or eliminate the expected benefits of competitive bidding. If the auction is designed well and provides adequate incentives, competitive bidding for the right to operate a concession for a given number of years should elicit the most efficient operator. If bidders believe that renegotiation is feasible and likely, however, their incentives and bidding will be effected, and the auction will likely select, not the most efficient provider, but the one most skilled at renegotiations. Ample anecdotal evidence indicates the existence of apparent opportunistic bidding on concessions, a cause for concern (Guasch, 2004). Strategic underbidding (or overbidding, depending on award criteria), to some extent encouraged by the incompleteness of contracts, also may explain the high proportion of renegotiations. Firms win concession contracts by strategically underbidding (or overbidding), with the expectation that they will be able to renegotiate in the future. Thus bids will not necessarily be correlated with efficiency, and some enterprises may possess a systematic advantage in renegotiation skills and chances of success. Renegotiation should occur only when justified by the initial contract’s built-in contingencies or by major unexpected events.

In a regulated environment where firms are not free to adjust prices as they see fit, and in the event of adverse economic conditions that do not allow them to earn expected returns, it is rational to expect a change in contract terms to restore profitability, that is, it is rational to expect renegotiation. Thus it might make sense for firms seeking concession rights to submit their most optimistic bids, with the expectation that, if things do not turn out as well, they can renegotiate the terms of the contract, drawing on the financial equilibrium clause. But what if the financial equation does not hold because a firm submits an unreasonable bid with a very high transfer fee or very low tariff?3 Should the firm be held to its bid, or should it be bailed out? The right answer is that, barring major external factors, operators should be held to their bids. And if petitions for renegotiation are turned down, operators ought to feel free to abandon the projects and bear the corresponding costs or penalties. The appropriate behavior for government is to uphold the sanctity of the bid and not to capitulate to opportunistic requests for renegotiation. Doing so may lead to the abandonment of a concession, but that is a price worth paying, and in fact can help governments establish a reputation for not being easy with renegotiation demands. They would also discourage future aggressive bids. Governments should reject opportunistic requests for renegotiation more often and allow concessions to fail. Such outcomes would reduce the incidence of renegotiations.

But governments have had a hard time adopting that strategy because there are political costs to accepting concession failures. Although cancellations and re-nationalizations of private infrastructure projects attract headlines, they have been relatively uncommon. Of the 2,485 private infrastructure projects concluded between 1990 and 2001, just 48 (less than 2 percent) saw the exit of the private sector. But such data may simply indicate that governments have been unable to commit to a policy of no renegotiation and have given in to opportunistic renegotiation. Many governments have conceded rents to operators during opportunistic renegotiations when it would have been more appropriate to hold the operators to their initial bids even though, in the short term (that is, before a government establishes a reputation for not conceding to opportunistic renegotiation), such an approach would increase the number of abandoned concessions. Thus it could be argued that the incidence of abandoned concessions has perhaps not been high enough to establish a much needed reputation of commitment to a policy of no opportunistic renegotiation in order to establish “good” equilibrium between renegotiation demand and incidence.

A second best, but difficult, approach for government is to reject aggressive bids. However, this is awkward and seldom done. Indeed, such bids are celebrated as a sign that the government has secured a very high transfer fee or very low tariff. Paradoxically, even well-meaning governments might avoid disqualifying aggressive offers for fear of being accused of corruption or favoritism.

Given that renegotiation requests are often accepted and resolved in favor of concessionaires, aggressive bidding and frequent renegotiation demands should not be surprising. Thus it often makes sense for firms to submit their most optimistic bids for concessions, with the expectation that if things do not turn out as well, they will be able to renegotiate the terms of the contract. But financial equilibrium imbalance can also be claimed at any time, and independently of having submitted a bid that is not financially viable. The information asymmetries on costs make it difficult for governments and regulators to properly evaluate those requests, creating incentives for firms to argue financial imbalance.

The objective is to improve the design of concessions to secure long-term sector efficiency, fostering compliance with the terms agreed to by both the government and the operator. To establish such an environment, concession laws and contracts should include elements that (i) focus on securing long-term sector efficiency and discourage opportunistic bidding and renegotiation, and (ii) are embedded in regulations that impede opportunistic renegotiation and force contract compliance.

Public perception of PPP programs vs. reality

In spite of these results, public opinion about private participation in infrastructure is at best mixed and fairly negative in Latin America. A recent survey of opinion shows that 63 percent of Latin Americans are against privatization (Figure 12.5).

Figure 12.5Percentage who disagree with the privatizations

Source: Latinobarometro surveys, 1998 and 2004.

While, as mentioned, the program and reforms could have been implemented better, the overall results, as shown, are quite positive. Yet public perception appears quite negative. Although it seems to be a paradox, there are valid reasons for the divergence between perceptions and reality. In order to solve this paradox, it is important to understand the reasons that underlie popular discontent and this negative point of view. The process of privatization could have been better publicized and its content better explained. Had this been done, privatization could have achieved greater benefits and enjoyed higher popular approval. The context in which the programs of private participation were developed was one of excessive optimism and belief in quick positive profits, many promises, a lack of realism, poor handling of expectations, and a breach in contractual agreements by both parties. The social criticism of privatization is ample and varied, including concerns about corrupt transactions in the privatization process (transparency of the process and handling of the resources, and regulatory deficiencies and regulatory capture); excessive profits for the operators; social policy in relation to increased tariffs; access by the poor to the benefits of the projects; the frequent lack of social tariffs for those who cannot afford the costs of the service; the treatment of the affected workers, particularly those dismissed in the process; the design of the concessions and privatizations; and the abuses of renegotiation. The common denominator of these complaints seems to be the social distribution and the lack of transparency within the process. It is certain that most of the discontent, the source of the opposition, is legitimate, owing to the deficiencies in the design and implementation of the programs which need to be better understood and corrected in the future programs.

Conclusions and lessons

The preceding sections on performance impact evaluations and the detrimental effects of renegotiation highlight the importance of proper regulatory and contract design and implementation. Good design includes the following concession contract elements:

  • Concession contracts should be designed to avoid ambiguities as much as possible, and be awarded competitively—rather than through direct adjudication or bilateral negotiation—only after they have been carefully reviewed and the qualifications of bidders have been screened.

  • Contracts should clearly define the treatment of assets, evaluation of investments, outcome indicators, procedures and guidelines to adjust and review tariffs, criteria and penalties for early termination of concession, and procedures for resolution of conflicts.

  • For private sector participation to be successful and achieve the desired objectives, contracts and regulations need to be designed and enforced appropriately. The key objective should be to ensure that the contracting parties comply with the agreed conditions. Thus, barring major unforeseen events and contingencies (which can be spelled out in the contract), the key issue is how to increase the likelihood that the signatory parties to a concession contract—the private sector operator and the government—comply with the terms of the contract, and that opportunistic renegotiation by either party is dissuaded. A key starting point is the design of better contracts that, while seeking long-term sector efficiency, do not facilitate renegotiation and penalize non-compliance.

  • Concession contracts should contain clauses committing governments to a policy of no renegotiation except in the case of well-defined triggers. They should stipulate the process for and level of adjustments. The contract should specify that the operators will be held to their submitted bids. This approach forces operators to bear the costs of aggressive bids and of normal commercial risks—even if doing so results in the abandonment of concessions. In addition, the first tariff review should not be entertained for a significantly long period (at least five years) unless contract contingencies are triggered.

  • Concession contracts should provide for significant compensation to operators in the event of unilateral changes to the contract by the government, including penalties.

  • Consideration should be given to making operators pay a significant fee for any renegotiation request. If the renegotiation is decided in the operator’s favor, the fee would be reimbursed.

  • Detailed analysis of seemingly aggressive bids—or at least of the top two bids, particularly if they differ significantly—should be required before a concession is awarded. And if the financial viability of aggressive bids appears highly dubious, a mechanism should be in place to allow those bids to be disqualified or to increase the performance bond significantly in relation to the difference between the bids. In any case, operators should be required to post performance bonds of significant value.

  • Claims for renegotiation should be reviewed as transparently as possible, possibly through external, professional panels to assist regulators and governments in their analysis and decision-making. Any adjustments granted should be explained to the public as quickly as possible.

  • Hurried, quickly organized concession programs should be avoided. Such an approach might secure more transactions, but it also leads to less satisfactory outcomes.

  • An appropriate regulatory framework and agency should be in place prior to the award of concessions, with sufficient autonomy and implementation capacity to ensure high-quality enforcement and to deter political opportunism. In addition, the trade-offs between types of regulation—price cap and rate of return—should be well understood, including their different allocations of risk and implications for renegotiation. Technical regulation should fit information requirements and existing risks, and regulation should be defined by objectives and not by means. Thus performance objectives should be used instead of investment obligations.

  • Proper regulatory accounting of all assets and liabilities should also be in place, to avoid any ambiguity about the regulatory treatment and allocation of cost, investments, asset base, revenues, transactions with related parties, management fees, and operational and financial variables. To ensure consistency, lock-in effects, and adequate tariffs, contracts should generally be awarded on the basis of the highest proposed transfer fee rather than the lowest proposed tariff.4 Outcome targets (regulation by objectives) should be the norm in contracts rather than investment obligations (regulation by means).

  • Finally, to make new PPP programs sustainable, the social aspects causing the backlash need to be addressed through better communication to create popular support. It is essential to promote the program’s infrastructure improvements, advertise the initiative, manage the expectations that the program may have on the status quo, and realistically argue the cost-benefit trade-off of the program. Communication must not only justify the programs, but also periodically inform the public about the progress of the program, as well as about any changes or problems. Not only must the reforms be successful, but that success must also be communicated through greater transparency to provide a safeguard against corruption at all levels and to obtain greater popular support; through greater fairness and support to those adversely affected in the design of the transaction; and through the incorporation of social policies, such as social tariffs and financial assistance to those adversely affected by the programs, for instance those losing their jobs. Programs or policies should be implemented to support users and workers, and affected communities must be part of the strategy of a successful program from the start. Initiatives should be launched and supported from the bottom up in areas and locations where the benefits and costs will be incurred.


Corresponding author’s e-mail:

A variety of studies have used a similar means and medians methodology, beginning with Megginson and others (1994); however, all of them implemented a before-and-after methodology, simply comparing the years just before and after the change in ownership.

The following equation offers a simplified representation of financial equilibrium, where revenues minus costs should provide the appropriate return on investment:

where R is profits, P is prices or tariffs, Q is quantity or output, OC is operation and maintenance costs, T is taxes, D is depreciation, r is the opportunity cost of capital, and Ki is invested capital. If the award criterion is a transfer fee, it appears under Ki. If it is the lowest tariff, it appears under P. In principle any appropriate bid, whether based on K or P, has an analysis behind it that balances the above equation. A strategic or opportunistic bid (a transfer fee or a tariff) is, presumably, one where the left-hand side of the equation (profits) is less than the right-hand side (allowed returns to capital). The objective of such a bid is to win the concession with the expectation of later renegotiation, arguing that the equation does not balance, and that higher tariffs or lower future investments are needed to restore financial equilibrium.

The least present value of revenues criteria developed by Engel, Fischer, and Galetovic (2001) should be strongly considered for road concessions, given its built-in incentives deterring renegotiation.


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