Renegotiations of Water Concessions: Empirical Analysis of Main Determinants

AbstractThe private sector has been increasingly involved in the construction, management, and operation of water systems. There are several models for private-sector participation, but concessions have been made among the preferred choice of local, state, and federal governments. The literature identifies the uncertainty surrounding long-term, capital-intensive infrastructure projects as the main motives leading to renegotiations. The results of renegotiations are biased toward increasing tariffs, and compensation paid by the public sector only more rarely negatively affects the private partner. Renegotiations are perceived as being the main pitfall of concessions. This paper will analyze a unique data set of renegotiations of 31 water concessions in Portugal covering a period from 1995 to 2015. Results show that lower consumption and additional investments are among the main motives for renegotiation, which can occur at any point during the lifetime of a concession. The analysis confirms some initial hypotheses, such as larger concessions and longer contracts being more likely to be renegotiated. Indirectly, the occurrence of elections tends to increase renegotiations.