A Governance Approach for Managing Public–Private Partnership Renegotiation

Abstract

High infl ation, fi scal consolidation, and high debt burdens weigh heavily on infrastructure investment, which is also aff ected by other global development issues including Russia’s invasion of Ukraine and the coronavirus disease (COVID-19). On top of this, the world is experiencing volatility in fi nancial markets and the continuing threat of climate change. Research by the Asian Development Bank (ADB) demonstrates signifi cant impact from climate change in multiple sectors, including risks to health and natural ecosystems resulting, for example, in an 11% loss of gross domestic product (GDP) in Southeast Asian countries by 2100.1 Infrastructure procurement through public– private partnership (PPPs) is particularly vulnerable to this disruption. PPP contracts are inherently incomplete because decision-makers cannot possibly anticipate all events over the 30 years or more that is typical of a PPP contract. PPP contracts tend to be rigid and highly prescriptive, which can result in circumstances where the procuring agency is tied to contractual clauses which may not apply over the course of the contract’s life span. Renegotiations may be necessary to adjust to a changing environment and unanticipated circumstances. A strong regulatory framework and project preparation capacity in line with best international practices can help to mitigate or manage renegotiations. However, the frequency with which PPPs are renegotiated suggests that renegotiations may be unforeseen events due to poor design of contracts and opportunistic fi rm behavior.