Public Private Partnerships (PPPs) have been widely applied around the world in the provision of public works and services, While a large number of PPP projects in different sectors have been successfully developed with increased value for money to governmental departments and the general public, concessions of many other projects in both developed and developing countries were renegotiated or terminated early due to various unforeseen risks. Renegotiations and early terminations of PPP agreements may cause huge losses to the host governments and reduce the perceived strengths and advantages of PPPs against traditional procurement approaches.

Previous literature about PPPs in the field of construction management ignores renegotiations and early terminations of PPP projects and both the...[ Read more ]

Public Private Partnerships (PPPs) have been widely applied around the world in the provision of public works and services, While a large number of PPP projects in different sectors have been successfully developed with increased value for money to governmental departments and the general public, concessions of many other projects in both developed and developing countries were renegotiated or terminated early due to various unforeseen risks. Renegotiations and early terminations of PPP agreements may cause huge losses to the host governments and reduce the perceived strengths and advantages of PPPs against traditional procurement approaches.

Previous literature about PPPs in the field of construction management ignores renegotiations and early terminations of PPP projects and both the government and the private sector lack of expertise to deal with such problems. On the other hand, previous literature about PPPs in the field of contract theory has raised a conflict about renegotiation. Some scholars urge that it is optimal to write contracts as complete as possible so as to prevent costly renegotiations, while others think that it could be wise to write incomplete contracts at the very beginning and renegotiate contracts to the optimal after uncertainties reveal. Hence, it is necessary to explore renegotiations and early terminations in PPP projects from both theoretical and empirical perspectives.

In order to understand the status quo of renegotiations and early terminations in PPP projects, this research presents a comparative analysis of international PPP agreements and model contracts and multiple case studies of PPP projects located worldwide, so as to develop a protocol including triggering contingencies, implementation procedures, compensation approaches and best practices for both the government and the contractor to deal with renegotiations and early terminations. This research also conducts a Delphi surey to evaluate the impact on value for money (VFM) of renegotiations and early terminations. When confronted with serious risks, governments can use the measures with the lowest level of impact on VFM.

Furthermore, the optimal contractual arrangements for renegotiation in PPP projects are investigated. Based on real option analysis, this research develops a mathematical model to capture the value of renegotiations in PPP projects and finds that it would be optimal to choose a renegotiation-allowed contract because renegotiations in PPP project may have a huge real option value and the higher the uncertainty, the higher the renegotiation value. This research also develops a game theoretical model to analyze the influence of information asymmetry on renegotiations and shows that an information disclosure mechanism must be set in the agreement so as to reveal the contractor's real risk impacts; after that, the justified reasons for renegotiations can, but not necessarily, be specified in the agreement.

And then, the implementation strategies of renegotiations and early terminations are studied. To facilitate renegotiations, this research has developed a concession renegotiation framework and compensation models for three common compensation measures, "toll adjustment", "contract extension", and "annual subsidy or unitary payment adjustment". With regard to early terminations, this research develops compensation estimation framework and the corresponding mathematical model for both a market value approach and a book value approach. Through applying these compensation models, the interests of both the concessionaire and the host government of the PPP project are safeguarded.

The theoretical result concluded by this research is consistent with the wisdom of incomplete contract theory that renegotiation-allowed contracts can be applied in PPP projects. But renegotiations should be regulated due to high transaction costs, for which much effort is deserved in future research. This research also contributes to the empirical literature because the implementation strategies proposed by this research facilitate the host government and concessionaire in effectively solving the compensation issue of future renegotiated and early-­terminated PPP projects in a fair way.