Changes in Condition

Although changes in market and political conditions cannot be fully anticipated, the contracts must contain provisions for such contingencies, including a process to negotiate changes, should they be required. These provisions cannot be so loose or generic as to render the contract meaningless or without “teeth,” but neither can they be so onerous as to prohibit revisiting certain terms, should conditions change. For example, there may be certain expected outcomes that are fundamental to the public sector (such as affordable housing percentages or profit-sharing formulas that can only change if the government passes new legislation). Nonetheless, future governments should be permitted to modify terms if policy changes over time. The private sector may want the ability to have extensions of time to deliver the project, should market conditions not be favorable to investment. In this context, they do not want to be held responsible for externalities beyond their control. All of these considerations must be carefully weighed so as to provide the flexibility needed to manage change on both sides—without sacrificing the core terms.

In Santiago, Chile, during the implementation of the Repopulation Program, the municipal master plan was modified 29 times. These changes sought to either allow more density and height in some areas, or to restrict and lower the height of the buildings—including the definition of areas of patrimonial protection (Arraigada, Moreno, and Rovirosa 2007). The real estate sector has taken advantage of the flexibility allowed by the master plan. The number of both floors and housing units per building has increased three times. The average number of floors is 13, the number of housing units per building is 176, and the average size of each unit is 69.6 square meters (sq m) (For details, see chapter 5.)

A 2004 World Bank report found that 41 percent of infrastructure concessions in Latin America were renegotiated (mostly in the transportation sector). In all of these cases, the government had to renegotiate the contracts within two years of initiation. This fact undermines all of the benefits of a bidding process, turning it into bilateral negotiations between the selected developer and the government. In these cases, the private sector developer or operator usually has significant leverage because the project has already started. Therefore, it is difficult and inefficient for the government to deny renegotiations and start a new bidding process. World Bank findings (2004) suggest that in order to reduce the risk of renegotiations, contracts should include clauses that forbid renegotiations—except in the case of well-defined triggers. Furthermore, in the case of ostensibly aggressive bids, which may seem better than other submitted bids, the government should develop a detailed analysis before a contract is awarded.

In some cases, the private sector can be obliged to post performance bonds of significant value. It is notable that in some instances, it is the government that initiates renegotiations. This was the case in Shanghai, China, when halfway through the project, the government changed the terms of the contract and the private developer had to comply. For more details, see the box below.

Government-initiated renegotiations in the development of Taipingqiao in Shanghai, China