Using the Economic and Financial Reequilibrium Model to Decrease Infrastructure Contract Incompleteness

Abstract

Renegotiations are becoming an undesirable protagonist in infrastructure concessions, raising doubts about the merit of this procurement model. Renegotiations emerge as a consequence of contract incompleteness. When contracts are unable to forecast conditions in the long run and anticipate all possible contingencies, they become obsolete, and both parties must negotiate new terms. The economic and financial reequilibrium (EFR) model, applied in most infrastructure concessions contracts in Portugal, provides a tool to manage the renegotiation process. Given that it is not possible, or affordable, to write complete contracts because of high transaction costs, parties negotiate the rules under which the process of renegotiation might occur. By doing so, it is possible to reduce the incompleteness of contracts, but the model is not immune to opportunistic behaviors. This paper reflects on the effects of the EFR model by providing real data and a case study of a concession and provides some alternatives that are able to improve the performance and management of infrastructure contracts regarding the renegotiation phenomenon.