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Renegotiation Case Studies

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The Renegotiations of Public Private Partnerships in Transportation

Part of the book series: Competitive Government: Public Private Partnerships ((CGPPP))

Abstract

Renegotiations are project specific phenomenon’s, and depend on the project characteristics as well as contractual features and governance model. Therefore, this chapter provides a unique perspective over PPP renegotiations covering a range of six projects, developed in the countries presented and discussed in the previous chapter. Each renegotiation analysis will cover the following topics:

  1. 1.

    Introduction (describing the main features and objectives of the project and also the public partner);

  2. 2.

    The PPP process (describing the tendering and the winning bid—the private partner);

  3. 3.

    The financial structure of the PPP;

  4. 4.

    The risk allocation matrix;

  5. 5.

    The renegotiation case;

  6. 6.

    The main findings from the case study.

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Notes

  1. 1.

    For a definition of PPPs please see Chap. 2, or Grimsey and Lewis (2005); OECD (2008) or Sarmento (2010).

  2. 2.

    Chapter 11: Typically filed by businesses who intend to continue operations and repay creditors at the same time, through the implementation of a court-approved reorganisation plan. This reorganisation can involve restructuring debt and also the rescaling of operations for profitability (Adarkwa et al. 2017).

  3. 3.

    The other three bidders were: Itenere; Babcock & Brown/Challenger-Transfield; Morgan Stanley/Autostrade.

  4. 4.

    The company had about $6.3 billion in obligations to secured lenders (Bathon 2014).

  5. 5.

    The proposal sought an early exit from Chap. 11 requesting that the court allow a post-bankruptcy approval of an asset sale by August 2015 with proceeds distributed among its creditors, OR if the asset sale was unsuccessful its creditors could buy a 95.75% stake in the restructured company, using proceeds from a $2.75 billion additional borrowing to restructure its debt (Randazzo and Fitzgerald 2014). The plan had support from more than 87% of senior secured debtholders and 100% support from equity owners (Schnitzler 2009).

  6. 6.

    Roumeliotis and Stone (2014) as follows:

    1. A consortium of Canada Pension Plan Investment Board (CPPIB) with Ferrovial SA’s toll road operator Cintra and Canadian investment manager Brookfield Asset Management;

    2. Australia’s Hastings Funds Management who partnered with the California Public Employees’ Retirement System (Calpers) and Italian toll road operator Autostrade Meridionali SpA;

    3. Spanish infrastructure operator Abertis Infraestructuras SA with Borealis, which is the infrastructure investment arm of the Ontario Municipal Employees Retirement System;

    4. Alberta Investment Management Corporation (AIMCo) and Abu Dhabi Investment Authority (ADIA); and

    5. Australian infrastructure fund manager IFM Investors, which is owned by 30 Australian pension funds.

  7. 7.

    Australia’s IFM Investors reached a $5.73 billion agreement to purchase ITRCC’s lease of ITR for 66 years until 2081. IFM contributed $3.2 billion in equity, expecting yields ranging from 8 to 9%; the balance of the funds came from $2.5 billion in senior debt financing from nine banks and three institutional investors (Reinhardt 2015a). ITRCC, indicated that current traffic levels will generate revenues sufficient to repay the new senior debt, so IFM’s large equity contribution was critical (Reinhardt 2015a). By July 2015, IFM had refinanced a portion of the bank debt through the issue of over $1 billion of senior secured revenue bonds by ITRCC; the notes were rated BBB and applied to a $551 million bridge loan and a portion of a $1.27 billion term loan (Reinhardt 2015b). Deal between the state and ITRCC where the state would receive $1 billion over three years from ITRCC in exchange for a one-time 35% toll increase on commercial trucks; the Indiana Finance Authority (IFA) subsequently approved the arrangement (Carden 2018). The deal, however, caught legislators by surprise, and several voiced concerns about the transparency of the arrangement and their lack of involvement (Kelly 2018a, b).

  8. 8.

    Debt Service Cover Ratio—Calculated as: (Free Cash flow to the Firm/Debt service) (Yescombe 2011).

  9. 9.

    This contract included active traffic management, inspection and maintenance of bridges, pavements, earthworks, motorway communications and a range of other highway assets, a comprehensive winter maintenance programme and provision of 24-h emergency response teams, cyclical highway maintenance and a range of environmental works, including grass cutting of highway verges, landscaping and horticultural improvements (source: contract).

  10. 10.

    Chaos in the transport network led to strong protests in the streets at the beginning of the operation. This was due to several causes: changes in government; a lack of preparation, and; a too big an approach to a large network. For more details see Gschwender (2007) and Monuz and Gshwender (2008).

  11. 11.

    The renegotiation also has led to the termination of one small concession operator, which was unable to provide the service in accordance with the terms of the contract. The concession was subsequently awarded to a new operator.

  12. 12.

    The expansion of the network created a problem of overlap in some of the systems, which led to a new renegotiation by 2009.

  13. 13.

    By operating, a bus needed to be in movement 5 min out of each 30 min. This created considerable difficulties for the monitorisation of the index, which resulted in the implementation of changes to the control system in 2008.

  14. 14.

    During the life of the concession several renegotiations were carried out, as described in Albalate and Bel-Piñana (2016), which are not detailed in this case-study.

  15. 15.

    Debt service is the sum of interests and yearly debt repayments maid in accordance with the initial financial case-base and the contract signed with lenders (Cruz and Sarmento 2018).

  16. 16.

    DSCR- Debt Service Cover Ratio: Free cash-flow to the firm/Debt Service (Yescombe 2011).

  17. 17.

    During 2018 and 2019, at least eight highway concessions were closed on decision of the courts, nasmely: [R-2 (Madrid-Guadalajara), R-3 (Madrid-Arganda), R-4 (Madrid-Arganda), R-5 (Madrid-Navalcarnero), AP-41 (Toledo), AP-7 (Cartagena-Vera y la Circunvalación de Alicante), AP-3 (Ocaña-La Roda), and M-12 (Eje Aeropuerto)]. This could represent a total cost to the government of €5 billion, although at this moment the Spanish government has only recognized €1.6 billion of liabilities.

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Authors and Affiliations

  1. CERIS, Instituto Superior Técnico, Universidade de Lisboa, Lisbon, Portugal

    Carlos Oliveira Cruz

  2. Advance/CSG, ISEG - Lisbon School of Economics and Management, Universidade de Lisboa, Lisbon, Portugal

    Joaquim Miranda Sarmento

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Oliveira Cruz, C., Miranda Sarmento, J. (2021). Renegotiation Case Studies. In: The Renegotiations of Public Private Partnerships in Transportation. Competitive Government: Public Private Partnerships. Springer, Cham. https://doi.org/10.1007/978-3-030-61258-0_6

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