A PPP renegotiation framework:a road concession in Greece

Nikos NikolaidisGEKTERNA, Athens, Greece and Department Shipping, Trade and Transport,

University of the Aegean, Chios, Greece, and

Athena RoumboutsosDepartment Shipping, Trade and Transport, University of the Aegean,

Chios, Greece

Abstract

Purpose – The purpose of this paper is to present a framework approach to guide the identificationof potential public private partnership (PPP) renegotiation outcomes is presented. The framework isapplied to a road concession project under renegotiation in Greece.Design/methodology/approach – The framework combines the estimation of stakeholder payoffswith respect to the various strategic options available. Their potential acceptance is evaluated withrespect to the power distribution within the stakeholder network. The contextual environmentdetermines the respective power position of each stakeholder in the network.Findings – The proposed framework is applied to a road concession case in Greece, underrenegotiation as a result of the economic crisis. The analysis highlights the importance of thecontextual environment and the limitations of solutions that seem “satisfying” for all stakeholdersinvolved.Social implications – The framework is designed to guide both public and private parties involvedin the renegotiation processes in identifying potential solutions or the inability to reach outcomesunder specific contextual environments. Assessments are made based on expert knowledge ratherthan data collection, which is impossible during the renegotiation phase. The application proposedprocess limit renegotiation transaction costs.Originality/value – The renegotiation framework based on stakeholder payoffs and power theory, isan approach especially useful for complex contract renegotiations, where multiple stakeholdersinfluence the final outcome. The importance of the contextual environment is highlighted. In addition,the paper contributes to the empirical renegotiation literature.

Keywords Concessions, Renegotiation, Stakeholders, Power distribution, Mitigation strategies,Greece

Paper type Research paper

1. IntroductionPublic private partnerships (PPPs) have been widely used as an infrastructure deliverymodel by many governments, especially in the transport sector where transportationcapacity was needed to facilitate, support and respond to economic growth.Practitioners and academia have placed emphasis on properly allocating risks, in aneffort to achieve “satisfying contracts”, as defined by Simon (1955). However, evidenceon transport PPPs (cf. Guasch, 2004; Estache et al., 2008; Estache, 2001; Baeza andVassallo, 2010) indicates that agents (the public and private sector) settled on plansthat seemed complete at the agreement stage and proved incomplete at a later time dueto incomplete or asymmetric information ex ante or due to policy trade-offs (e.g. indemand forecasts; cf. Flyvbjerg et al., 2005). In transport PPPs, incompleteness arises,in principal, from the misallocation of risks to the agents involved and the fluctuationof these risks over the contractual period, commonly between 25 and 35 years. Traffic/revenue risk has been a source of major PPP contract renegotiations. As PPP contracts

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were not designed to be incomplete, as defined by Williamson (1979, 1985),renegotiation is not formally included in most contracts. In this case, a contractrenegotiated ex post is always accompanied by residual-rights and one party havingthe ability to “hold-up” the other leading to unsatisfying renegotiated contracts andthe increase in transaction costs.

This research aims at contributing to the academic and empirical literature onex post PPP contract renegotiations by building on a framework model initiallypresented by Roumboutsos (2009) and expanding it so as to guide parties in identifyingpotential outcomes, taking into account both the power structure between the agentsinvolved in the renegotiation, as well as the agents’ perceived payoffs. This frameworkis created to apply regardless of information symmetry and/or availability; as such,input during renegotiations is deemed confidential. Framework assessments are made onthe assumption that all actors involved behave rationally and pursue their establishedbest interests. More specifically, the framework is based on identifying all stakeholdersinfluenced by the renegotiations; assessing respective payoffs or utilities of optionsproposed in the renegotiation; and mapping the power distribution between stakeholders.The framework takes into account the contextual environment and how this impactson stakeholders’ power distribution. Section 2 provides the theoretical basis for theframework, its development and application. The applicability of the proposed frameworkis demonstrated on the “Ionia Odos” motorway concession contract in Greece. Section 3briefly describes the case to be studied, the Ionia Odos concession (IOC), which iscurrently under renegotiation. In Section 4, the proposed framework is applied to theexample case. Finally, Section 5 concludes with remarks on the framework’s findings andlimitations. The ultimate scope of applying the proposed framework is to enhance allparties’ ability of strategic understanding of the renegotiation process and, potentially,lead to shorter renegotiations and, therefore, a limitation of transaction costs.

2. Background and PPP renegotiation framework2.1 Literature backgroundContract renegotiation has been the object of much attention in the economic literature.One stream of development concerns the necessity of full commitment fromcontracting parties (cf. Bolton and Dewatripont, 2005) or framing robust contractsthat will not be renegotiated in the future (cf. Dewatripont, 1989). In this case, imperfectinstitutions (Guasch et al., 2006, 2007, 2008) lead to limited commitment andrenegotiations. Transaction cost economics sees contracts as inefficient governancestructures that need to adapt to the changing environment. Renegotiations in this caseare necessary, risky and encounter opportunistic behaviours (cf. Saussier, 2000).By incomplete contract theory, renegotiations are considered a positive development,where parties ex post complete their contractual agreement with respect to investmentsthat were non-contractible ex ante (cf. Grossman and Hart, 1986; Hart, 1995). However,empirical observations support developments that incomplete contracts providereference points for entitlements in ex post trade (Hart and Moore, 2008; Albalate andBel, 2009). Reports show losers and winners (Estache, 2006) or a win-win game(De Brux, 2010) depending on contracting parties’ behaviour and the reason whyrenegotiations occur. Ho (2006) noted that, if a government is willing to renegotiate,it implicitly encourages aggressive bidding, leading to renegotiations, which arecaused by the pressure put by the private sector when the problem relies on low trafficvolumes and by governments when unexpected increases of traffic generatesenormous benefits that threat its political acceptance.

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While the above brief description of theoretical development stream is notconsistent, there is one topic of convergence: the strategic behaviour of the contractingparties in ex post negotiations. Identifying stakeholders’ strategic behaviour is thecornerstone of the proposed renegotiation framework.

2.2 PPP renegotiation frameworkThree are the key elements of the proposed PPP Renegotiation Framework: the actors,players or otherwise stakeholders, as mapped in the respective power distributionnetwork; the various potential renegotiation outcomes or re-structuring of the initialagreement, which constitute the new mitigation strategies; and the estimated payoffsof the various potential renegotiation outcomes. These key elements combined in theproposed framework are presented herewith and are illustrated in Figure 1.

Complex projects such as PPPs encounter a wide range of stakeholders, whichare not limited to the parties/actors directly involved in the respective contract.The categorization of stakeholders as internal and external is limiting as an in-depthstakeholder analysis may identify significant differentiations between actors in thesame group. While it is suggested (Trujillo et al., 2002; Vassallo, 2006; Engel et al., 2009)that, due to information asymmetries which in turn promote strategic behaviour, thereare four main groups of players in a PPP arrangement: the users, the government(which represents the taxpayers and the voters), the operators (including sponsors andfinanciers) and the regulator (the new autonomous off-spring of the government), it isestimated that in changing environments stereotypes may be misleading and a fullscale stakeholder analysis is proposed.

Furthermore, in assessing strategic behaviour it is not enough to identifystakeholders and group them with respect to their interests. In many cases, interestsare aligned with respect to prevailing power dependencies. These in the proposedframework are mapped as proposed by Salancik and Pfeffer (1978) and Pfeffer andSalancik (1978) in the ABCs of power. According to this theory, an agent B has power

Optimize[Utility] × [Power]

X

Stakeholder Utility Stakeholder Power

ContextualEnvironment Cn

StakeholdersRestructuring

Options

Figure 1.Schematic presentation ofPPP RenegotiationFramework

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over another A to the extent that B fulfills A’s interests over other, if any, existingalternatives (Salancik and Brindle, 1997). Furthermore, reflecting the importance ofthe contextual environment, an agent, C, regulates the relationship between A and B.The theory places great emphasis on the regulatory/contextual agent, C, which, inpractice, dictates the behaviour of the stakeholders and a change in the contextualagent may alter the power distribution. The regulatory agent, C, may changedepending on exogenous or endogenous factors.

While many reasons may lead to contract renegotiation, the actual process is basedon the development of a variety of contract restructuring scenarios, which attemptto address the identified “contract incompleteness”. In practice this effort is concernedwith promoting a new risk allocation setting within the contract and assessingthe respective risk mitigation strategies. Each party of the contractual arrangementis assumed to assess rationally its expected payoff, with respect to each proposedscenario, enhanced by the power this party has over other stakeholders withinthe network.

More specifically, for each proposed scenario of contract restructuring, everystakeholder receives a payoff, which is defined with respect to its own utility function.Each stakeholder’s utility function may be complex and depend on a number of factorsincluding economic, positioning, strategic and political ones. It may also varydepending on external factors or changes in the economic, institutional and otherenvironment and, in all cases, it is dependent on each stakeholder’s agenda with respectto the contractual agreement. Therefore, each stakeholder, i, will resume a payoff, (ui),for each restructuring option Sj,8jA{1, 2,y, n}. Each stakeholder will also seek tomaximize its payoff over the area, R, of all potential renegotiation outcomes.As indicated in the previous section, (re)negotiations are a highly political processinvolving various bias and subjectivity of the revealed behaviour. The proposedframework is based on identifying the rational relationships of risk-neutral player-stakeholders. Hence, the assessment of payoffs are, potentially, best made from theviewpoint of the risk neutral and rational observer. This is the approach followed inthe presented case study, where the intention is to demonstrate the methodology, whichmay also be adopted by each stakeholder when analyzing the renegotiation plain.

In order to minimize efforts, the proposed renegotiation framework does not seek todefine the “characteristic function” or each stakeholder’s actual utility, but introduces autility rating system. By this approach each stakeholder is studied under variousrestructuring scenarios and assigned a value in the range of [�3, 3] describinghow much better off (worse off) this stakeholder is with respect to his base scenario.A rating of [�3] corresponds to an assessment of the outcome that would be sodamaging for the stakeholder concerned that he would prefer to break the deal. On thecontrary, a rating of [þ 3] would correspond to the outcome that the concernedstakeholder would be so much better off compared to his base scenario as to be willingto provide increased support to the project (e.g. this could be translated into anadditional injection of funding into the project if the stakeholder were an activefinancier). This qualitative rating allows for assessments to be made by third parties oreach stakeholder for all others. Finally, this rating is enhanced depending on the powerthe particular stakeholder has in the network.

3. Case study presentation: IOCThe IOC involves the construction of a newly built motorway extending from Antirrioto Ioannina, 196 km, and is partially financed by using the toll revenues of a 175 km

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section of a brown field motorway that connects Athens to Maliakos. Both green andbrown field parts of the project are on the TEN-T Priority Project 7 (PP7), while theeastern axis is on the heavily used motorway connecting the three largest cities inGreece, namely Patra, Athens and Thessaloniki, widely known as PATHE, from theinitials of the cities it connects. The project also adds value to an existing concession:the Rio-Antirio Bridge. Its sponsors and its funding structure are presented in Figure 2.

The Greek Parliament ratified the concession agreement in early 2007 (Greek Law ,2007). Financial closure followed soon after, under positive macroeconomic projectionsand debt priced at very competitive rates. Similarly, the sponsor’s expected returnon equity was accordingly priced to levels that reflected low sovereign debt risk, asevaluated by international rating agencies. Traffic projections at the time of thefinancial close were such that 85 per cent of revenues would be returned to the State asa result of the foreseen revenue sharing mechanism.

Construction coincided with the Greek sovereign debt crisis that led to the country’sbailout by a coalition between the International Monetary Fund, the European CentralBank and the European Commission in 2010. At the same time, debt providers imposeda draw-stop on the project, an action that, in conjunction with the receding trafficbrown field motorway section has created a gap in the project’s financing, jeopardizingits completion. As a result of this gap, construction works ceased a few months later.At this stage the project was approximately 25 per cent complete corresponding tosome 489 M euros in drawn funds (www.ypodomes.gr, accessed 13 December 2011).

Under these conditions and as GDP forecasts did not view this as temporarycondition (see Figure 3), the original business case and construction funding schemewere rendered unsolvable, leading the Greek Government, the lenders and the projectcompany to engage in a contract renegotiation procedure in order to reach a neweconomic balance in the existing agreement that would allow project completion, as theterms of contract termination involve a complex and cumbersome procedure thatwould potentially lead to very high litigation costs for all parties involved. A similarfaith was installed for the other four concession road projects underway, which, alongwith the Ionia Odos project form the so-called “axes of development”, named after theexpectation that their completion would improve the Greek TEN-T infrastructure andserve regional growth.

Bid process

Two phase (prequalification/ final stage):

4 consortia in first stage (2001), 2 in final stage (2005)

Project Company

33.33% TERNA (local construction group)

33.33% ACS (Spanish construction group)

33.34% FERROVIAL (Spanish construction group)

Funding Structure

190 mil Shareholders (Equity)

110 mil Debt

360 mil State/EU funds

640 mil tolls received during construction

1,200 mil Investment

Figure 2.Ionia Odos project keycharacteristics

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Three distinct states of contextual environment (C of the ABCs of power) have beenidentified in the course of the project’s development.

The first corresponds to the financial close state (concession agreement execution/ratification by the Greek Parliament). National macro-economic figures are positive,sovereign risk exposure is not considered, political risk is non-existent and lendingrisk is considered minimum securing a positive financial environment (Roumboutsosand Anagnostopoulos, 2008). Moreover, this contextual environment state (2007) is priorto the global credit crunch, which manifested just a few months after the agreement.

The second state of contextual environment is described by the conditions leadingto renegotiation. Within this contextual state, the Greek sovereignty crisis is consideredto be a national crisis developed and limited to the Greek borders. Socio-politicalinstability demonstrates and all assumptions concerning project implementation aredismissed. Gradually, the government loses credibility. In addition, any renegotiationoutcome needs to be ratified in parliament, where the government has a slim majorityrendering this process both tactical and questionable in terms of success.

The third state of contextual environment concerns the situation as of late 2011.The debt crisis is now considered structural and manifests at varying degrees in mostEuropean and western countries. A new coalition government representing the grandmajority of Greek Parliament is in office. This latter fact is the key differentiatingpoint with respect to the contextual environment of the second state: the coalitiongovernment has 250 seats over 300 in parliament and, therefore, the politicalacceptance of any outcome is not questionable.

Finally, it is evident that the complexity embedded in all megaprojects furtherenhanced by the project delivery model (concession) is reflected in the numberof stakeholders involved and their divergent interests under the evolving economiccrisis. These stakeholders are briefly presented in Figure 4 and will be further analyzedin the next section.

4. Application of the proposed frameworkThe process of renegotiations can very well be described as a bargaining process,where the parties involved seek to reach a mutual agreement upon a choice of

2002

Source: Ernst and Young (2012)

–10

–8

–6

–4

–2

0

2

4

6

8

10%

yea

rCDP(left-hand side)

Real GDP and employment

2004 2006 2008 2010 2012 2014 2016

%

31

26

21

16

11

6

Forecast

Employment(right-hand side)

Figure 3.Real GDP and

employment in Greece,historic and forecasted

figures

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one specific alternative over a set of available alternatives. Problems arise in anynegotiation process when the parties involved have conflicting interests over the set ofavailable alternatives and, moreover, when power dependencies create leaders andfollowers. The comparative assessment payoffs with respect to the potential outcomesof the renegotiation and how this is altered depending on the power distributionwithin the stakeholder network, as described in the methodology is applied herewithfor the case of the Ionia Odos renegotiations.

4.1 Ionia Odos potential renegotiation outcomes (alternatives) and stakeholder payoff ratingsA set of potential outcomes as identified in literature (cf. Guasch, 2003, 2004; Estacheet al., 2008), including extension of concession period, reduction of investmentobligations, changes in the asset-capital base and contract termination has been testedin the proposed framework.

More specifically, the extension of the concession period could be used to gear theproject’s economics towards a more viable outcome. There are, in this case severalcomplications to consider: the nature of the project would change, providingunsuccessful bidders with possible grounds to claim against the project, since theduration was fixed during the initial bid. A reduction of investment obligationsimpacts the project’s capital expenditures, and thus the financing needs duringthe construction period. Many concessions and other PPPs have been termed hybridPPPs by the World Bank as a significant part of the asset-capital base is public;national funds or contribution from the European Structural Funds (ESF). Reducingthe exposure of sponsors and lenders by increasing the contribution of public funds isan alternative, which may be well accepted by all the parties if public funding weremade available. Finally, even though the ultimate goal of the renegotiation process is toavoid “termination”, this alternative is included as a potential renegotiation outcomein order to illustrate the repercussions on the agents’ perceived payoffs.

The Government

The Operator

Localsponsor

InternationalSponsors

The Lenders

RelationshipBanks

Non-Relationship

Banks

The Users

BrownfieldMotorway

users

GreenfieldMotorway

users

GreekParliament

EuropeanCommission

Figure 4.Ionia Odos keystakeholders

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The assessment of payoffs as perceived by the project stakeholders follows.Notably, the framework proposed is intended as a support tool during the renegotiationprocess. As such, stakeholders are not willing to divulge their strategies and expectedpayoffs during this sensitive period. Consequently, as in this case, stakeholders’payoffs should be evaluated based on the assessment of several observable factors,including public statements, long-term business strategies based on annual reports,the exit strategies presented in the concession agreement pertaining to eachstakeholder and the value of the project with respect to each stakeholder’s annualturnover. Also, macroeconomic factors such as Greece’s projected economic outlookbased on international agencies’ reports and public statements made by Greek Stateofficials were also taken into account. The assessment of these payoffs, as proposed inthe methodology, is simplified by rating each renegotiation outcome in the range[�3, 3]. These payoffs are presented in Table I and justified as follows.

The government is a major party in the concession agreement and the ultimate ownerof the project, following the completion of the concession period. Since the governmentinitiated the procurement process of the project, and is one of the partners in theconcession agreement, it can be assumed that the government has a vested interest in theproject’s completion, and project termination would be the least favourable outcome ofthe renegotiation process. Being directly accountable to the voters in terms of providingefficient, safe and state-of-the-art infrastructure, it can be inferred the government’spayoff with respect to the three alternatives as presented above, will be positive, andnegative in the case of contract termination. Considering the fact that a change in theasset capital base (option 3) would involve an increased financing obligation for thegovernment and a reduction of investment obligations would result in a projectsignificantly lesser than the one planned under procurement, the government’s payoffunder renegotiation options 2 and 3, respectively, is rated at 1. In comparison, anextension of the concession period would neither affect the project’s quality, nor would itaffect the current financial position of the government (by having it contribute funds); thepayoff of the government in this case is higher than the other two renegotiation options,rated at a grade of 2. Finally, due to the combined repercussions of failing to secure thecompletion of the project in addition to the obligation to pay the lenders’ exposition, theworst payoff is assumed in the case of contract termination (�3).

Potential renegotiation outcomes

StakeholderInvestmentreduction

Concessionextension

Capital-basechanges

Contracttermination

Government 1 2 1 �3Local sponsor 1 2 3 �2International sponsors 1 2 3 �1Relationship banks 1 1 2 0Local non-relationship banks 0 �1 1 2Foreign non-relationship banks 0 �1 1 2Brown field motorway users 1 1 1 0Green field motorway users 1 3 3 �1Local residents 0 0 0 0Greek Parliament 1 2 1 0Other concessions 1 2 3 �1European commission 1 2 2 �1

Table I.Stakeholder assessment

of payoff rating

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With respect to project sponsors, for the local sponsor being a company primarilyengaged in infrastructure development, the project is significant in its portfolio. It isassumed that the local sponsor has a vested interest in the project’s completion whileproject termination would be the least favourable outcome, especially given the localityof this stakeholder. A reduction in investment obligations, even though it wouldfacilitate the timely completion of the project, would also reduce the expected payoff,the value of which forms a large percentage of the group’s construction revenue, asillustrated in their financial statements. As such, the utility of the local sponsor underthis scenario is evaluated at 1. An extension of the concession period would grant moretime to the local sponsor to receive a return on its initial investment in the project,without reducing the project’s size (and respective payoff from construction); however,the exposure to revenue risk would be higher, since a longer time-commitment wouldbe necessary. Given that the local sponsor’s main activity is project construction, it canbe assumed that they would prefer shorter investment periods. As such, their utility inthis case is evaluated at 2. The payoff of the local sponsor under the third scenario isconsidered as the best possible outcome, since external funding would be introduced tothe project, without affecting the project’s size or concession duration. Thus, the payoffof the local sponsor under the third renegotiation alternative is evaluated at 3. Contracttermination would yield the lowest payoff, as the local sponsor would bear the risk oflosing its case in arbitration, as well as failing to complete construction of the project.

As a shareholder in the SPV, the international sponsors share many characteristicsand incentives with the local sponsor; their main difference is the locality of theproject; whereas the local sponsor is established in Greece and is dependent onthe project’s completion and the country’s economic upturn, the international sponsors,having a more diversified global portfolio of infrastructure projects, could make thedecision to divest from the project with less hesitation and therefore, their utilityassessment under both the second and third contextual environments is lower thanthat of the local sponsor.

Relationship banks provide funding to the project through non-recourse loans,backed by the project’s future revenues, and by the Greek State in case of contracttermination. At the same time, they often provide recourse-backed loans to thesponsors for other activities. The repayment of the loans committed to the project isconsidered crucial as to their structured loan portfolios. The growth and prosperity ofthe sponsors is dependent on these banks’ finances, as future cash flows aimedtowards repayment of loans provided by these banks could be at risk should theproject’s conditions worsen for the sponsors themselves. As such, this stakeholder isconsidered as having a positive payoff under all renegotiation outcomes except forcontract termination. Their payoff is considered lower than that of the sponsors, as thefinancing of the project does not form as large a part of the Lenders financing portfolio.Scenario 3 provides the highest payoff to the relationship banks, since the introductionof external funding sources reduces their financing obligations, and thus theirexposure to a project affected by Greece’s negative economic outlook. Finally, thepayoff in case of contract termination is evaluated at 0, as such a case would on onehand eliminate the lenders’ obligations to further finance the project (their existingloans would be repaid by the State), but on the other it would pose a threat to thesponsor’s payoffs, indirectly affecting the relationship banks as well.

Non-relationship banks provide funding to the project through non-recourse loans,backed by the project’s future revenues and by the Greek State in case of contracttermination, but do not have any other direct financing relationship to any of the

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sponsors. For this group, the highest payoff is achieved under the case of contracttermination, since it would facilitate an elimination of financing obligations in additionto the immediate repayment of drawn loans. A positive payoff is also achieved inthe case of changes in asset capital base, since this would mean a reduction in thenon-relationship banks’ exposure to the project’s and the country’s risk. Reducingthe project’s scope would not necessarily imply a reduction in exposure for the non-relationship banks, since it could be done without refinancing their current obligations;as such the achieved payoff in this case is evaluated at 0. An extension of theconcession period would not provide a positive payoff, since the non-relationship bankswould still be committed to finance a project bearing a risk significantly higher thanthe one originally committed to (i.e. prior to the Greek financial crisis).

Brown field users should also be considered as project financiers, as the tolls theypay consist of one of the project’s main sources of funding. The upgrade of the brownfield motorway through the addition of another lane, along with the increase of safetymeasures such as the ‘new jersey’ separator will improve significantly travel time andsafety. However, this group’s behaviour elasticity with respect to toll rates and thegeneral macroeconomic conditions was expressed in un-willingness to pay. The Statedid not choose to exercise its power. Successful project completion may provide apositive payoff under all renegotiation strategies. Taking into account, however, thatthis motorway section was less expensive under State control (prior to the concessionagreement execution), the payoff of this stakeholder would not exceed a rating of1 under any renegotiation scenario, as the user benefits would only be marginallyrealized, especially in comparison to those using the green field motorway section (thebenefits of which are much easier to realize for the end user compared to the alternativeroutes). This stakeholder’s payoff in case of contract termination would largely dependon whether the government would keep tolls at the current level or reduce them oncethe project company is dissolved. In this case, the payoff is evaluated at 0.

For green field users the project will provide a new safer and efficient transportroute providing the potential for growth. Therefore, all renegotiation scenarios apartfrom contract termination may provide a positive payoff. Reducing investmentobligations may be less attractive and a payoff of (1) is assigned. The other scenariosare considered with a payoff of (3).

The Greek Parliament is required to ratify any amendments to the concessionagreement. Considering the number of austerity measures passed, it is likely thatmembers of the parliament may oppose renegotiation alternatives that have fiscalimplications. However, the successful renegotiation of the project has remained high onall governing parties’ public agendas, and it is highly unlikely that the members of theparliament belonging to these parties would be opposed to the project’s completion.As such, this stakeholder’s payoff follows a trend identical to that of the government inall potential renegotiation scenarios. It must be noted that contract termination wouldnot require ratification. However, as the parliament represents various political trends,it would be difficult to predict the payoff of the parliament as a whole.

As the project forms part of the European TEN-T network, it can be deduced thatthe European Commission’s would realize a positive payoff in all cases of successfulrenegotiation. Failure to reach a renegotiation leading to project termination wouldbe undoubtedly the least favourable outcome. It must be noted that changes thatnegatively affect the project’s nature and/or quality, as well as contract termination,would have a negative impact on the European Commission’s payoff from the project.Decreasing investment obligations includes a risk of failure to meet EU TEN-T

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motorway construction standards; as such, payoff would be marginally positivein this case, evaluated at 1. Increasing the concession period would impose asignificant change in the project’s scope, as the initial concession period wasforeseen at 30 years. This option provides a higher payoff than reducing theproject investment, since it does not introduce any risk of the project not meeting of EUTEN-T motorway standards. The third renegotiation scenario would involve anapplication of ESF for the completion of the project. In this case, since these funds arealready committed for the country’s growth, and since this scenario would not alter thequality or project duration, payoff for the European Commission would also be higherthan the option involving reductions of investment obligations. Therefore, a payoffof 2 is realized in alternatives 2 and 3, and a payoff of 1 is realized if renegotiationscenario 1 is followed.

Finally, concessionaires finding their respective projects under similar conditionsmanoeuvre accordingly, in an effort to secure resources for their own projects. Anysuccessful renegotiation would create a positive precedent for this stakeholder group;as such, their realized payoff is identical to that of the sponsors.

4.2 Stakeholder power distribution and renegotiation potential outcomeAs proposed in the methodological framework, apart from assigning respectiveestimations of payoffs for each potential outcome it is important to identify thestakeholder(s) with power within the stakeholder network. Figures 4 and 5 mapstakeholders relations under contextual environments 2 and 3, respectively.

In both figures, an arrow directed from each stakeholder A to another stakeholder Bindicates dependency of A on B. Both figures show that the SPV is dependent on itsfinanciers (sponsors and lenders) and the government. The sponsors are dependent ontheir financiers (relationship banks), whereas the only lenders that are dependent onanother stakeholder are the local banks, as the government guarantees their liquidity.Finally, the government depends on the parliament (her electorate and ratifying entityof any renegotiation solution) and the European Commission (her main regulator and

Key:

-Project Actor

-ProjectRelationship

Nameof Actor

Description ofrelationship

Government

Green fieldmotorway

users

Localrelationship

Banks

EuropeanCommission

Brown-fieldmotorway

users

ForeignRelationship

Banks

Local non-relationship

Banks

Foreign non-relationship

Banks

InternationalSponsors

LocalSponsor

SPV

Guarantees liquidity

Finance other activities

through loans

OtherConcessionCompanies

GreekParliament

Elect

Regulates

Regulates re

gula

tes

Elect

Elect

Elect

Finance th

rough debt

Finance

through equityFinances through equity

Finance through debt

Finance through loans

Fina

nce

othe

r act

ivitie

s

thro

ugh

loan

s

Regulates, provides

financingFigure 5.Stakeholder powerdistribution undercontextual environment 2

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financier as a result of the economy’s bailout). The parliament in turn is dependent onthe voting public (the users).

The determining difference between the two contextual environments is thedependency of the government on the parliament; in Figure 5, the government isdependent on parliament as it only has a marginal majority. The dependency betweenthe government and the parliament changes in Figure 6, as the government (now acoalition) holds the grand majority in parliament, which allows overcoming theparliament’s dependency on the users and leads to the dependency on the governmentto resolve the situation.

Following through the power relationships between the actors under the thirdcontextual environment (Figure 6) leads to the identification of two main groups ofpower holding actors: the international lenders and the European Commission; thesetwo actors are expected to play a decisive part in the renegotiation outcomes, and therenegotiation outcome that provides them with a highest payoff is the one that is morelikely to be implemented.

The dependency on international banks is attributable to the decreased availabilityof funding for Greek infrastructure projects due to the financial crisis. Thisdependency is even greater under the third contextual environment, since the country’ssovereign risk rating decreased even further, severely affecting the availability offunding. It needs to be noted, however, that the dependency of the State on either of thestakeholders that belong to the lenders’ group, would be significantly reduced in thecase where a change in the asset-capital base is introduced; a high enough Stateparticipation in the funding of the project could facilitate the exit of a problematicexisting financier, in essence removing them from the project’s financing and the powerdistribution map altogether.

The European Commission, while not directly involved influences the project inmultiple ways. As a regulator and financier of the government, its consent will need tobe established prior to any renegotiation outcome being implemented. Moreover, sincethe project forms part of the EU TEN-T network, and, more specifically, concerns PP7,

Key:

-Project Actor

-Project Relationship

Nameof Actor

Description ofrelationship

Government

Green fieldmotorway

users

Localrelationship

Banks

EuropeanCommission

Brown-fieldmotorway

users

ForeignRelationship

Banks

Local non-relationship

Banks

Foreign non-relationship

Banks

InternationalSponsors

LocalSponsor

SPV

Guarantees liquidity

Finance other activitiesthrough loans

OtherConcessionCompanies

GreekParliament

Elect

Regulates

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financing Figure 6.Stakeholder powerdistribution under

contextual environment 3

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any changes to the project agreement (especially the injection of additional state or EUfunds, since the European directives are particularly strict regarding state aid inongoing projects) will require the EC’s consent.

4.3 Estimated renegotiation outcomeThe next and final steps to the analysis of the Ionia Odos case study and application ofthe proposed framework are the evaluation of the collective payoffs of the stakeholdersunder each renegotiation outcome and the identification of the renegotiationoutcome that would most likely be accepted by the power holding agents, identifiedin the previous section as the international banks and the European Commission.Specifically, both the second and third renegotiation options provide an equally highcumulative payoff for all the stakeholders involved; however, since the secondrenegotiation option yields a negative payoff to the international banks, it is muchmore likely that the third renegotiation option will be ultimately chosen.

5. ConclusionsPPP contracts, mainly due to their inherent nature of ex ante incompleteness, are highlyexposed to exogenous risks. As such, contextual environment changes, as shown in thecase study of Ionia Odos, are likely to cause shifts in the positions of the stakeholdersinvolved in such contracts. The methodology described herein shows that the ABC’s ofpower theory presented by Salancik and Pfeffer (1978) and Pfeffer and Salancik (1978)provides a good basis for the analysis of the stakeholder positions and consequentshifts thereof, depending on the contextual environment.

Analyzing the Ionia Odos case highlighted the importance of contextual environmentand the influence on stakeholder positions. More specifically, the proposed methodologycan assist private and public entities, engaged as internal stakeholders to a project of acomplex contractual nature, to recognize and identify each other’s interests, facilitatingthe formulation and proposal of fair solutions in order to resolve potential renegotiations.The application of a simplified approach to rating payoffs and understanding the powerdistribution allows for a systematic understanding of strategies that renegotiating partiesmay adopt. The application, also illustrated how a change in the contextual environmentmay change the optimum solution. Furthermore, the framework may help stakeholdersunderstand the motivations, expectations and relative power of the rest of the playersinvolved in a renegotiation; therefore, it can help reduce stakeholders’ unrealisticexpectations as to the renegotiation’s potential outcome. Finally, the presentation of thecase study contributes to the respective empirical literature.

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About the authors

Nikos Nikolaidis is pursuing a PhD at the University of Aegean with a focus onPPP contract renegotiations. He has been working as a project finance specialist instructured finance and PPP transactions since 2005. He has been employed as asenior advisor in Ernst & Young and currently holds a Project Manager position inGEKTERNA. Nikos Nikolaidis is the corresponding author and can be contactedat: nikos.d.nikolaidis@gmail.com

Athena Roumboutsos is an Assistant Professor at the University of the Aegean,Department of Shipping, Trade and Transport. She worked as a consultant andProject Manager for the public and private sector in more than 20 countries forover 20 years before joining the University in 2005. Her research interests includerisk analysis and management, stakeholder management, change managementand innovation, transport infrastructure evaluation, procurement and contractmanagement, public private partnerships (she is Chair of COST Action TU1001),

accountability and entrepreneurial responsibility, entrepreneurship, alliances and strategies,game theory and models .

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