Contract Renegotiation in PPPs: Evidence from Italy

Public-Private Partnership (PPP) has gained participation in the project deliveries because of its life-cycle approach incorporating the design, construction, and long-term operation of public infrastructure. Despite its multiple strengths, PPPs projects are characterized by heterogenous time and cost performances because of the frequent occurrence of missed deadlines and cost overruns. These heterogeneous performances vary among the multiple types of PPP such as Build Operate Transfer (BOT) and Build Lease Transfer (BLT), each, with different contractual characteristics. The PPP body of knowledge has studied the frequency and value of renegotiations in different countries. However, the PPP literature still lacks analyzing the risks that motivated these renegotiations based on a national PPP program basis. To address this gap, this study collected data from the Italian public dataset to examine the risks that lead to contract modifications in BOT and BLT PPPs from 2007 to 2021. Results demonstrate that three infrastructure types adopt significantly BLT as the preferred project delivery, namely, healthcare, energy, and education infrastructure. These types of arrangements are used to be driven by motivations regarding taxation savings contrasting to the partnership advantages promoted by BOT projects. Interestingly, two out of the three projects that preferred BLT schemes (i.e., healthcare and energy) were the infrastructure types with the highest renegotiations. Consequently, contractual arrangements motivated by taxation advantages rather than efficiency in the partnership may result in higher renegotiation rates. Conversely, BOT is the preferred project delivery for other infrastructure types such as transport infrastructure, waste treatment, and water PPP projects. Surprisingly, two out of the three most common causes of PPP renegotiations are endogenous risks that are allocated to the private sector, namely, performance and technology/materials. This intended allocation is not consequently adopted during long-term lifecycle projects through litigation resulting in effective contractual modifications. Results also demonstrate that the infrastructure type matters for renegotiations. Three risks demonstrated a much higher proportion of significance for BLT respecting BOT projects, namely, change in law, technical issues, and design. Consequently, BLT projects are especially focused on buildings for specific sectors that require a high level of requirements for the operation during the lease. As a result, these projects tend to be located in urban areas and the services that the concessionaire has to provide for the long-term leasing frequently motivates litigation aiming for contractual modifications. Conversely, BOT projects demonstrated a higher proportion of contractual modifications derived from performance and project site. Unlike BLT, BOT projects contain a higher proportion of linear and non-urban projects such as interurban transportation infrastructure and energy projects, among others. This higher impact of risks derived from unlikely events that entail meaningful consequences resulting in contractual modifications in BOT reveals that linear and non-urban projects are more susceptible to facing unforeseen unlikely events regarding project site and archeological unforeseen findings.