Re-negotiations in PPP Transport Infrastructure - Essay Example

? Number Renegotiation in PPP Projects How an Equitable Re-Negotiation Can be Achieved Which Offers Good Value To Both Principal and Promoter in Transport Infrastructure with respect to PPP Projects Institution Grade Course Instructor’s Name Date Renegotiation in Transport Infrastructure Introduction Globally, there is the tendency of national governments to incorporate the public-private partnerships (PPP) to provide and upgrade infrastructures, as well as public services. Talk of light rails, upgraded electric railway system, mainland road and main highways, as well as port facilities, are just but some of the projects the private sector is getting substantially involved in, conjunction with the public and local authorities to enhance service delivery in the transport system. Majority of these engagements are made effective via a group of diverse companies and contractual concessions. According to Smith (2002) the Principal refers to the one responsible for granting a concession and the ultimate owner of the facility after transfer. They are mostly government agencies, or regulate monopolies. On the other hand, the promoter is the organization that is granted the concession to build, own, operate and transfer a facility. In the course of project contractual engagements and project work, the companies and contractual concessions are faced by serious shortcomings calling for renegotiations. According to Estache and Rus (2000), one crucial consideration that is made during the drafting of a concession contract, is that, during all probability of the life of contract, some unpredicted circumstances will arise forcing the parties of the contract to renegotiate. The statement is truly relevant in cases of concession contracts. The logic behind this is due to the long period of the contract, thus making it anticipate all possible contingencies unfeasible for either of the parties. On the same note, unforeseen contingencies also occur as a result of concession contracts for port facilities and relate to expensive fixed assets that are easily removable and redeployed to a different location (Gomez-Ibanez and Meyer 1993). Renegotiations occur in developing and developed countries alike. Gomez-Inbanez and Meyer (1993) analysed transport concessions in industrialised countries and made out that renegotiations are remarkably common. Renegotiation of a concession contract is probably the rule and not the exception, and they should not be perceived as a failure (Peter, Kuyper and Candolle 1995). Due to concession contracts being essentially long-life documents, the parties are not in a position to foresee all possible future contingencies at the moment of the contract drafting. Thereby, this should be noted in advance, and the parties ought to consider several future conflict scenarios and put in place provisions for inclusion of at least basic renegotiations rules. Nevertheless, it is critical for the concessionaire to avoid renegotiation at an early stage as it may place in jeopardy the credibility, transparency, and fairness of the bidding process (Estache and Rus 2000). Contracts are mainly renegotiated within a few years after official contractual signing and results into better contractual terms for the contract holders (promoters). The principle and the promoter are crucial entities in the signing and effectual implementation of the contracts to the project (Smith 2002). This paper aims at evaluating the principle and the promoter in renegotiations regarding public-private partnerships concession contracts, in regard to transport infrastructure. Further, equitable renegotiations are imperative to the realisation of the completion of the project in question. This paper also aims at evaluating how to achieve equitable renegotiations, which offer superb value to both the principle and promoter. The contractual renegotiation is effective in the reduction of contract incompetence; conversely, a poor design of these can allow for opportunistic behavior by the concessionaries. Thus, there is a greater need in evaluating the effective ways that lead to equitable renegotiations. The Concession agreements A concession is usually a business operated and guided under a contractual agreement, and associate with a degree of a specific project in a particular geographical area (Akintoye, Beck and Hardcastle 2003). A concession agreement can be termed to as a right granted by a given government to a given company or corporation specifying the rules under which the company ought to follow, within the area of operation. Further, with regards to public service concessions; it occurs whereby a privately owned company enters into an agreement with the local authorities and granted the exclusive right to control and uphold, as well as carry out development to a public utility for a given number of years. According to Demsetz (1968) infrastructure concessions are a mechanism to bring competition into natural monopolies, as it applies in most infrastructural undertakings. Prior to incorporation of PPPs in government projects, what seemed to be the elucidation to surmount the lack of rivalry in the public sector service stipulation was rapidly questioned by the contributions on contract incompleteness. The behaviours of opportunists become disquiet mainly as a result of hindrances to entry and large dejected reserves, leading to a number of renegotiations. Concession contracts form the most familiar type of contractual PPP; in this regard, the government or a public authority transfers construction, maintenance and operation of the project at hand to a private consortium, who receives the right to charge a user fee for a given term (Vassallo 2006). The fee may be fixed or variable with respect to the contractual agreement signed in advance. This means that the both parties must act in accordance to the set conditions and be bid by the contractual guidelines and directives as in the agreement. With respect to the transport infrastructure, this calls for a contracting company that is worth offering high quality transportation services. This will enhance the public to have trust with the authorities regarding the public funds and resources. According to Foote (2006), the United States has conducted effective testing regarding the concession contract model towards the management of transport infrastructure and monetise valuable transport assets as recorded by the Public Works. PPP Projects Renegotiations in Transport Infrastructure The subject of renegotiation is becoming progressively more imperative, since PPP provisions are more frequently used at both the local and international level (Cruz et al. 2011). Public Private Partnerships have attracted substantial interest in the recent past as probable modes to handle large and costly projects like road and rail construction. With an increase in the Public Private Partnerships (PPPs) for construction and operating infrastructure projects across all sectors of the national economy, it is crucial to ascertain the institutional structures essential for the stipulation of efficient management of this paradigm shift. The significance of the PPPs is improved service quality, risk sharing, project cost reduction, better budget execution and faster and earlier construction. In view of the fact that PPP projects are aimed at ensuring efficient service delivery at competitive costs, their importance lies in ensuring that these objectives geared towards the completion of public infrastructural projects are fully achieved (Yongjian et al. 2008). Consequently, it is critical to note that, with all integrity and accountability means, it is essential to safeguard the public exchequer from any unintended misappropriation or claims of concessionaries. Owing to this, there critical need to outline effective guidelines that ensures for monitoring of PPP Projects and enable project authorities to develop institutional measures for monitoring and regulation of their respective projects (Yongjian et al. 2008). Financing magazine (2006), states that the transport Public Private Partnership projects as contracted in 2003 globally totaled to 1,479. This clearly reflected an accumulation investment of US$579.5 billion, which positively shows the extent of clear proceeds with regard to the input brought about by the projects. Conditions prompting renegotiations in Transport Infrastructure Renegotiations take place after the contract is no longer able to cope with prevailing circumstances at that instance (Guasch 2004). The concession agreements and in particular those regarding the transport industry are known to take long periods of time. With changing environmental, economic and political situations that are experienced in every nation, the terms of the contract will at one point be in crisis. This leads to the parties that are the authorities and/or the concessionaire resolving for renegotiation whenever compliance with contractual terms is incompatible with the circumstance at hand (Cruz et al. 2011). Renegotiations are critical with regard to PPPs projects. Concessions granted by national governments are normally under intense scrutiny from the public, supervisory bodies like the Courts of Audit. This is prompted by the fact that local concessions are faced with massive lack of transparency; thus, calling increased surveillance from interested parties (Estache and Rus 2000). This is a problem that is common with developed and developing economies. This calls for the promoter to seek renegotiation whenever at risks to enhance proper compliance with the contractual terms of operation. Thereby, for equitable realisation of effective renegotiation and apparent carrying of the contract to a fruitful end, there critical need to ensure that the concerned parties in the agreements are content with the advancement of the project and the contract conditions do not jeopardise the effective realisation of the project. There are a number of key issues that need critical consideration prior to entering into new concession agreements, as well as the renegotiation of existing ones. The parties concerned are obligated by objective measures to ensure equitable renegotiations so as to realise excellent value not just to the two parties of the contract, but also the subjects being in direct contact with the project, and in this regard, it refers to the passengers (Gomez-Ibanez and Meyer 1993). The following are critical points to consider with respect to new renegotiations and agreements; first, there greater need for consultation and ensuring the participation of all stakeholders in the transport sector (Guasch 2004). Secondly, share the benefits with the communities and safeguard the traditional practice of the people in the area. For example, with respect to port projects, the communities around the area in developing countries should get priority with other community based projects sponsored by the proceeds of the project at hand. This promotes harmony. Further, the renegotiation and concession agreements should take into consideration the advocacy for policy implementation that mainstreams gender, ties commercial access and security to investment as well as embed sustainable natural resource use (Peter Kuyper and Candolle 1995). According to Estache and Rus (2000), renegotiation of a concession contract is possibly the tenet and not the exclusion, and one should not perceive it as a failure. Owing to the duration undertaken by the concession contracts, the high rates of contractual incompleteness and renegotiation are as a result of partly to the pioneering nature of these concessions, as well as reflecting the pressures likely to be endured in the course of the project implementation. According to Gomez-Ibanez (1993), statistics on renegotiation give little sense of the dilemma faced by the government and concessionaires as it dawns on them the reality of their contract not exhausting all the risks to be encountered, thereby, rendering the contract incomplete. This calls for effective measures in ensuring all issues, and impending risks are resolved or discussed amicably prior to the signing of the contract. The urge of central and local authorities in developing PPPs cans jeopardise the establishment of an effective and strong regulatory body for the supervision of the award process and design of the contract (Demsetz 1968). This leads to the majority of concessions being signed without the supervision from a regulatory body. Guasch (2004) asserts that the absence of a regulatory body during the signing of a contract positively influences the occurrence of renegotiation in the course of the project implementation. In this regard, the effective realisation of equitable renegotiation process that will enhance value to both the Principal and Promoter will be realisable with the inclusion of regulation and supervision not only during the signing of the contract, but also in the project implementation phase. Equitable Renegotiations in Transport Infrastructure The transport infrastructure is a crucial field of project undertaking as it enhances the development of other notable infrastructural assets (Gomez-Ibanez and Meyer 1993). The local authorities in every country always look into the fact that every concession in the country supports the interest of the citizens both in the short term and long term (Smith 2002). Thereby, the government will always be interested in concession agreements and renegotiations that are geared and reflect equitable distribution of value (Yongjian et al. 2008). Consequently, the contracting government always considers existing concessions and aims at building them towards successive achievement of the national set goals. The authorities’ desires should always be to seek and safeguard a closer partnership relationship that will benefit both the nation and the investor at hand (Foote 2006). In the real contracting situation, it is imperative to note that a growing and successful commercial operation is suitable for a given nation and helps in demonstrating the improved climate of investment, set by the contracting authorities. Equitable concessions and renegotiations call for extreme focus on conformity to the conditions of the agreements signed (Peter Kuyper and Candolle 1995). This enhances success and quality as well as ensures valuable projects are put in place. The process of developing renegotiation is highly uneven in various nationalities as well as in various sectors of economic development (Cruz et al. 2011). Therefore, there is significant need to ensure regulation and constant supervision of the process. This can be realised via the incorporation of a regulator, or use of a third party. According to Guasch (2004); Cruz et al. (2011), the existence and intervention of a regulator in the process of supervision of the contract design and processes of renegotiation, there are high chances of reduction in occurrences of renegotiations. Consequently, with regard to supervision by the regulator, the event of renegotiation will occur with respect to critical and unavoidable circumstances as all loopholes regarding the ineffectiveness of the contractual process will have been analysed. Thus, the application for a renegotiation will be a crucial undertaking, and one that cannot be evaded. On the same note, the effective renegotiation will be realised with utmost competence and transparency due to the trend of supervision employed, leading equitability and effectiveness (Yongjian et al 2008). Factors Regarding Equitable Renegotiations in Transport Infrastructure The term renegotiation mainly has a negative connotation. Nevertheless, renegotiations are not necessarily inimical as they can increase the welfare of all stakeholders involved in the course of the contract and its eventual of incompleteness. Guasch (2004) expresses that concessions and PPP contract renegotiations are normal all over the world, and his study outlines that 54.7% of the transportation projects in the illustration were renegotiated. The study also demonstrates that renegotiation is prompted, not just by the concessionaire, but also by the government. In the study stated earlier, 57% of the renegotiations were initiated by the promoter in the transport sector, while 27% and 16 % were made initiated by the authorities and common agreements respectively. Guasch’s research also showed that the renegotiations are much common with concessions awarded competitively than the ones awarded through direct negotiation. Thus, competitive award of concessions can be associated with effectual renegotiations. Contract theory distinguishes between complete and incomplete contracts. Salanie (1997) clearly outlines that a complete contract takes into account all variables that are or might be relevant in the course of the contract implementation. On the other hand, incomplete contracts are those whereby it is impossible to allow for all the events that can occur throughout the life of the contract. According to Bolton and Dewatripoint (2005), most long-term contracts are in practice incomplete; taking into account as a whole, the potential events that may eventually end up impossible. This means that PPP contracts being long-term ones fall closer to incomplete contracts and thus, are critical in enhancing renegotiation. Thereby, it crucial to note that, this calls for effective measures with regard to incompleteness to enhance the effectiveness of the renegotiation process towards the realisation of complete and successive concessions. To understand the effective implementation of equitable renegotiations, it is critical to note the difference in commitments and renegotiation. In contract theory, it is worth noting the concepts of commitment and renegotiation. Commitment refers to the ability of the stakeholders in a contract to limit their effective actions by pledging to fulfill the contract to some predetermined date (Bolton and Dewatripoint 2005). On the same note, the time of commitment verifies the rigidity extent of the contract. According to Salanie (1997), a commitment is full when the contract is never reconsidered, and the dynamic aspect diminished to the execution of the contract. Renegotiation is termed as the agreement ex-post between the parties that signed a contract in order to change one of the clauses of the contract (Cruz et al. 2011). There is a critical need to distinguish renegotiation from an interpretation of the contract so as to solve an event that is not explicitly established in the contract. With complete contracts, a full commitment will be beneficial owing to the contract determining the upfront of the most adequate solution in the case that any event would eventually happen. According to Salanie (1997), in the event of complete contracts, the ability to renegotiate acts as an ex-ante constraint on the Principal’s program and results to an efficiency loss. Increased rates of contractual incompleteness and renegotiations are orchestrated by the pioneering nature of many of the concessions, though they also reflect pressures likely to be endured (Gomez-Ibanez and Meyer 1993). There is an absolute need to come up with discretionary regulation to lessen the risky situation. It is not clear to state that incompleteness of contracts leads to ineffectiveness or in-equitability. The incompleteness was not inevitable, and the concession contracts are not inherent unstable per se, but rather the situation prompts clear understanding of the pressures existence towards the use of contracts in situations that are associated with the risk of incompleteness (Akintoye et al. 2003). The Principle and Promoter in Transport Infrastructure in the Realisation of an Equitable Renegotiation Concessions are effective ways towards the effectiveness of attracting private finance necessary to fund new construction or rehabilitation of already existing facilities (Vassalo 2006). In PPPs, sources of the promoters’ investment proceeds will not only come from the returns of impartiality investment in the concessionaire, but also from the construction and operation contracts since promoters may also act as the major contractor for the development and operation of the transport infrastructure (Estache and Rus 2000). Thus, the objective of the promoter is not to maximize the value of the firm’s concession but ensure effective implementation of the contract thus realising an effective and equitable process. The high opportunity cost of replacing the incumbent concession firm, even in the initial stage of a concession are one of the leading causes that hold the government for renegotiation (Peter et al. 1995). A clear example is the long and costly procurement process, together with the complicated financial and legal arrangements which renders the costs of replacing the promoters to be exceedingly high. The tendency to create soft budget constraints by the PPP governance may cause substantial transaction costs (Salanie 1997). The government as the principal with respect to this study has residual role that can be fairly extensive and include the provision of oversight. This entails the principal having the obligation of ensuring that the concessionaire (promoter) complies with the agreement and accepts any impending changes to the design, operating structures, or tariffs as stipulated for in the contract (Gomez-Ibanez and Meyer 1993). An outstanding example is with toll roads; agreements are often put and specify tariffs modifications depending on various economic conditions. The main obligation of the government is to ensure that a promoter adopts the correct formula for the recalculation of the tolls and introduces them on agreed timeframes or dates (Estache and Rus 2000). The oversight of performance in which penalty clauses apply like punctuality, cancellation, cleanliness and maintenance can be complicated due to monitoring being expensive and time consuming. However, the penalties should be well defined and expounded in the concession agreement and act effectively as the enforcement; thereby, it ought to be swift. Looking critically at the rescinding agreements, rebidding concessions and transition processes; they can turn out to be hugely expensive to the principal and negatively affect the individual customers (Foote 2006). This would mean ineffective measures to the government rendering the concession invaluable (Demsetz 1968). In cases where the process impacts to the international; trade, economic costs are probably significant. With respect to the impacts to the individual customers, political upheavals to avoid disruption may be intense. With regard to penalties that are so cumbersome, that neither the promoter nor the principal have a full grasp of the ramifications, they ought to be avoided, and new measures devised to enhance equitability in the whole process and realise evaluable results (Guasch 2004). With intense commitment of the principal, and in a particularly concerning the enforcement of agreements, this prompts the operators’ motivation to be compliant with the set conditions. With respect to concessionaries, there are cases where agreements extend for longer periods, this calls for the crucial need for investment to maintain the quality of service. This enhances the process of concession and the effectiveness of upcoming renegotiations in the course of project enhancement. The investments need to be treated differently in various agreements. Looking at an ordinary situation that will fit in this context is the toll road facilities. This is the case where the promoter’s investments will probably be repaid from operating the revenues. On the other hand, in port, airport and railway concessions, promoters may need to invest in additional assets that have longer lifespan than the concessions themselves. The government has a role in encouraging such a venture; this is in reimbursing the investment made within a given period at the end of the agreement with accrued allowances for depreciation at transfer, but this ought to be agreed upon in advance. In cases of external time constraint: which in most cases is the scenario: in the short term perspective, the government have the obligation of deciding whether it is worth effecting the project, keeping in mind that hasty restructuring or upgrading of its assets could result to perverse effects on the quality, equity or security level of the infrastructure project (Peter et al. 1995). Consequently, it is crucial to note that a more equitable, higher quality renegotiation process and eventual solution could take several years to be realised. This is in context to the versatility of the concessions that call for restructuring of the terms and modes of operations. Achieving Equitable Renegotiations in offering superb Value to both Principle and Promoter in Transport Infrastructure PPPs can said to be long-term commitments by the concessionaires and project authorities. The successful realisation and delivery mainly is reliant on the performance of the given obligations by the concessionaire and the relevant authorities (Akitonye et al. 2003). Effective management and monitoring of a contract will ensure its soundness, and robust, equitable realisation of the set objectives (Bolton and Dewatripoint 2005). However, the documentation of relevant communications pertaining the concession agreements and contractual activities, follow up actions and decision relating to contract execution are highly crucial (Salanie 1997). Their importance is pegged in their assurance for accountability of the entire process. Failure to give adequate attention to timely and appropriate actions might lead to compromise of the interests of the government and user. Further, it may cause the arousal of disputes and claims in arbitration proceedings and courts of law. There is an absolute need to focus on giving necessary attention to the process of concession. These are critical in reducing chances of disputes and claims. For equitable renegotiations, the processes of performance need to be dynamic and be under constant review (Yongjian et al. 2008). This is imperative as projects regarding to Public Private Partnership undergo change with time owing to their time frames (Gomez-Ibanez and Meyer 1993). Therefore, there is critical need to devise guidelines to provide mechanisms by which the set objective can be achieved. This leads to effective project implementation and improving equitability and adding value to the results of the project. Guidelines are critical in responding to the needs for establishing an institutional framework that would make certain conformity, to the contractual structure as entrenched in the concession agreements for PPP projects (Foote 2006). This is mainly with respect to safeguarding the interests of the public exchequer and the users. It is imperative to note that Guidelines and advisory measures, in the context are generic and advisory in nature and are meant to assist the Project Authorities in developing their own institutional machinery (Estache and Rus 2000). The Project Authorities might, if deemed necessary, suitably strengthen or enhance the suggested mechanism for ensuring that the objectives of Public Private Partnerships are realised. Consideration should be put into place to enhance factors ensuring effective application of PPP projects. These constitute technical and organizational, marketing and financial, legal and administrative, policy and regulatory, as well as political (Smith 2002). There should be sufficient flexibility, granted to the promoter organizations to enhance the project’s commercial viability failure to which the PPP option should be abandoned. There is a greater need to look into the rigid fiscal arrangement contemplated in the stabilisation of clauses within government that governs the concessions agreements. Stabilisation provisions ought to be flexible to cater effectively for the effectual catering of interests of resource extraction companies and host countries in an equitable manner (Vassalo 2006). The stabilisation clauses aim at maintaining the economic equilibrium envisaged in the concession agreement, rather than freezing the fiscal regimes governing the project. Since a key role, in the concession process is to engage the private sector in the proviso of transport services, the government control over the concession process once the agreement has been signed should be minimal. In this regard, the agreement must be detailed and possess minimal ambiguities specifically with agreements of longer terms. To minimize conflicting situations, clear lines of authority must be defined and each concerned party must be competent to performing in the way agreed (Guasch 2004). Some countries have a history of changing the concession procedures in the course of their performance; though it may complicate the process of implementation, it makes the concession more sustainable. Consequently, changes towards securing financial situations are particularly common. A clear example is in Bangkok where the transits system agreement was altered through the addition of appendices; this made the concessionaire secure financing and thereby allocating the probable risks precisely (Cruz et al. 2011). The government ought to state its objectives explicitly and therefore, determine the best form of concession for the necessary purposes. This will maximize the chance of achieving its goals. The promoter also ascertains the risks involved its information gaps and strengths relative to the private sector, along with the information and monitoring needed throughout the agreement. There is a great need as the principal to retain a number of regulations in spite of the mechanism chosen to supply the services. These incorporate controls on rapacious practices and market attentiveness, other than non-competitive practices and on safety and environment (Estache and Rus 2000). Further there is a need for quality controls, employment regulations, and price constraints. These will enhance concession and renegotiation implementation and ensure transparency, equitability and tranquility. The consequences of renegotiation, which is to say the extent to which the contract will be changed is independent of the triggering event. Renegotiation clauses contain a determined trigger; therefore they are less likely to produce a disturbing effect until that the triggering event occurs. This reduces the risk of renegotiation coming up prior to the time when it would be financially acceptable. According to Peter et al. (2005) at any time during the terms of the concession agreement, the principal and promoter ought to make consultations in order to determine whether, in the light of all pertinent conditions, the financial or other provisions regarding the agreement operates equitably and with no major detriments to the interest of either party. Further, intensification of the essential legal and regulatory framework for transport infrastructure encourages private investment venture. On the same note, critical measures are imperative in the clarification or revision of fundamental legal concepts and regulations across infrastructure sectors. This is crucial in building independent regulatory institutions capable of developing, and enforcing effective regulations, designing and supervision of concession contracts, ensuring easier accessibility and affordability of services, as well as enhancing regulatory transparency and credibility so as to reduce investors’ risks (Bolton and Dewatripoint 2005). Conclusion The provision of eminent transport infrastructure is a prerequisite for any national economy to achieve a higher growth trajectory on unrelenting basis. In order to achieve new insights in growth and effectiveness in PPP projects, there is a greater need for measures by both the Principal and Promoter to ensure equitable renegotiation process and add value to the proceeds of the concession. The process of PPP projects is lengthy, and their successful delivery will depend mainly on the performance of the respective obligations of the Principal and the Promoter. The process performance in the monitoring needs to be flexible and under constant review since project situations undergo changes with time (Cruz et al. 2011). This is orchestrated by the long duration of PPP contracts. In the quest for achieving a robust and sound contract, effective management and monitoring will be ensured by conclusive meeting of the set objectives. Owing to the accountability for providing infrastructural services rests primarily with the principal, and the promoter acts only as the grantee of the principal (government authorities) is deemed to act in respect to the set rules the set terms of the concession to enhance effectiveness, equitability and promote value to both parties of the agreement. Every Project Authority has an obligation of safeguarding the user interests. A critical note for consideration is the monitoring mechanism that is a tool for ensuring that the objective of each PPP project is achieved. This is with regard to the promoter and the principal ensuring appropriate project specific monitoring arrangements to ensure compliance to the set terms and thus enhance transparency, equitability and promote value addition to the eventual project’s results. A new jurisprudence with regard regulation of the entire life cycle of a concession agreement in the transport sector would have to be put in place to guarantee efficient, effective and equitable renegotiations. Further, with respect to documentation of relevant communication, follow up actions and decisions relating to contract execution are crucial towards the delivery of the agreements since they help in the realisation of an accountable course of action. Insufficient attention to appropriate action cannot only compromise the Principal and user interests, but also can give rise to disputes and claims in arbitration rendering the whole process inequitable and inappropriate, thus demeaning its value. Reference List Akintoye, A., Beck, M. and Hardcastle, C. (Eds.) 2003. Public Private Partnerships (PPP): Managing Risks and Opportunities. Oxford: Blackwell Publishing Company. Bolton, P. and Dewatripoint, M., 2005. Contract Theory. The MIT Press. 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