What triggers public-private partnership (PPP) renegotiations in the United States?

ABSTRACT Public-private partnership (PPP) renegotiations and their outcomes have been studied extensively in Latin America and Europe but not in the United States. Therefore, this study evaluates factors triggering U.S. PPP renegotiations by examining six highway PPPs located in California (2), Indiana (1), and Virginia (3). The findings suggest exogenous macroeconomic shocks, project and political complexity, and institutional inexperience are the most compelling triggers behind U.S. PPP renegotiations. These findings also highlight America’s distinct political and institutional environment – i.e. favourable to buy-outs as well as debt restructuring via bankruptcy – as a possible explanation for the absence of opportunism among U.S. PPP renegotiations.


Introduction
The United States has a long history of private-sector involvement in surface transportation infrastructure, dating back to the Philadelphia and Lancaster Turnpike in 1795 (Dempsey 2003).However, since the construction of the Interstate Highway System, alternative procurement mechanisms for transportation infrastructure investment, such as PPPs, have become increasingly attractive to state authorities (Engel, Fischer, and Galetovic 2006;US Department of Treasury 2014).While the number of U.S. PPPs remains small relative to Europe's PPP market (EPEC 2016), transportation PPP projects dominate the US market (PWFinance 2014; Casady et al. 2018Casady et al. , 2020)).
Beyond providing capital to finance infrastructure, PPPs bundle diverse services into long-term contracts that transfer or share risks between publicand private-sector partners (Iossa and Martimort 2008;Casady et al. 2019).
CONTACT Jonathan Gifford jgifford@gmu.eduResearch suggests that U.S. PPPs deliver such benefits, ranging from project acceleration and innovation to improved cost and schedule certainty (Bolaños et al. 2017;Verweij, van Meerkerk, and Casady 2022;Casady, Verweij, and van Meerkerk 2022), but the literature also warns of potential PPP inefficiencies (Shaoul, Stafford, andStapleton 2006, 2013).For example, the frequency of renegotiations in PPPs, especially in Latin America and Europe, has attracted attention from policymakers, scholars, and the public alike.Renegotiations broadly refer to any ex-post modifications in the PPP contract, and the outcomes of these renegotiations may include contract termination/nationalization, refinancing, and restructurings from bankruptcy.Studies show that slightly over half of transportation PPPs in Latin America and Europe undergo renegotiations, often creating multimillion-dollar contingent liabilities on government balance sheets (Domingues and Sarmento 2016;Guasch 2004;Guasch, Laffont, and Straub 2008).Such renegotiations, and their compromises, represent a common feature of private-sector contractual relationships since contract participants often need to accommodate unexpected changes not accounted for in the original ('incomplete') contracts (Hart and Moore 1988;Tirole 1999;Roberts and Sufi 2009;Rich and Tracy 2013).On the other hand, information asymmetries and asset specificity can also drive renegotiations by enabling opportunistic behaviour (Klein, Crawford, and Alchian 1978;Williamson 1993Williamson , 1996)).Given their long-term nature, inherent uncertainty, incompleteness, and need for sophisticated expertise, PPP contracts present a complex risk profile for renegotiations (Saussier, Staropoli, and Yvrande-Billon 2009;Small 2010;Tirole 1986).Since risk allocation is a primary benefit of PPPs for public sector decision makers (Asian Development Bank 2005;Daniel et al. 2015), understanding these risks is crucial for PPPs to maintain their appeal.
The existing literature focuses primarily on the negative consequences of PPP renegotiation experiences in Latin American and Europe (Chen, Daito, and Gifford 2016).Yet, renegotiation can be useful for decreasing contractual incompleteness (Cruz and Cunha Marques 2013a) and preserving public value through improved resilience and adaptability (Wei et al. 2022).However, when institutional environments are ignored, as is often the case (Beck, Demirgüç-Kunt, and Levine 2003;Katsivela 2007;La Porta, Lopez-de-Silanes, and Shleifer 2008;Qian and Weingast 1997;Casady 2021Casady , 2022)), any analysis of renegotiation triggers and outcomes is likely biased.For example, while other countries grapple with private sector risk factors driven by opportunism, political, institutional, and macro-level financial risks tend to affect PPP projects disproportionately in the U.S. (McCarthy et al. 2020).More specifically, America's common law structure, federalism, bankruptcy laws, and active capital market appear to influence renegotiation processes (Bolaños, Gifford, and Yun Kweun 2019;Casady et al. 2020).
Furthermore, renegotiation outcomes often arise from opportunism, the winner's curse, exogenous changes, and project complexity.Outside the U.S., the literature recognizes at least three potential outcomes: i) early contract termination due to poor performance (e.g., nationalization/re-municipalization); ii) debt default followed by financial restructuring; and iii) bankruptcy, followed by early contract termination (Guasch, Laffont, and Straub 2008;Soomro and Zhang 2015;Albalate, Bel, and Reeves 2021).Each outcome largely depends on the project's details and the public sector's goals, resources, and capabilities.As a result, U.S. institutions might provide policymakers with alternative mechanisms to manage renegotiation triggers, in contrast to other regions.
Consequently, this study focuses on two primary research questions: (1) How do renegotiations arise in the U.S. highway PPP market?
(2) How does America's unique institutional setting help policymakers manage these renegotiation triggers?
To answer these questions, this research begins by identifying four renegotiation triggers within the literature: opportunism; the 'winner's curse'; unexpected exogenous events; and project complexity.Six U.S. highway PPP case studies, located in California (2), Indiana (1), and Virginia (3), are then explored to determine the prevalence of these factors among U.S. highway PPP renegotiations.After discussing the case findings, this study concludes by identifying alternative (and sometimes complementary) mechanisms through which U.S. policymakers can manage renegotiations.

Conceptualizing PPP renegotiation triggers
Drawing upon a broad array institutional, economic, and organizational perspectives, the extant literature suggests several possible triggers for PPP renegotiations in transport infrastructure, ranging from 'endogenous and exogenous factors (as seen in relation to the specific PPP project under consideration)' to 'objective and subjective (or alternatively more technocratic/more political) factors' (Makovšek, Perkins, and Hasselgren 2017, 20).These causes of PPP renegotiations, as defined by the International Transport Forum (2017), are shown in Figure 1.
Renegotiation triggers tend to be rooted in one or more of these categories and fields of economic, institutional, and organizational theory.Yet, these categories are not mutually exclusive.For example, Cruz and Cunha Marques (2013a) explored the endogenous determinants of contractual renegotiation in local concessions and found that poorly designed contractual clauses enable opportunistic concessionaire behaviour. 1In fact, technocratic risks associated with contracting are exacerbated by poor government control and management of concessions (Cruz and Cunha Marques 2013b;Cruz, Cunha Marques, and Cardoso 2015).Yet, both government and private actors can behave opportunistically (Sarmento and Renneboog 2021).For instance, incoming public officials or incumbents facing electoral losses may pursue PPP renegotiations to generate popular toll reductions or capacity expansions (Bel and Fageda 2005;Guasch, Laffont, and Straub 2007;Engel, Fischer, andGaletovic 2009, 2001;Bitran, Nieto-Parra, and Sebastián Robledo 2013).This type of public sector opportunism, however, does not tend to be as consequential as private sector opportunism.Private partners might behave opportunistically if the procuring agency has limited experience with PPPs.By winning contracts with low offers or over-estimating demand, they can then hold-up the government by asking for higher compensation (Athias and Nuñez 2009;Bain 2009;Guasch 2004;Guasch and Straub 2009).For example, minimum revenue guarantees can spur strategically aggressive bidding and make renegotiation more probable (Guasch, Laffont, and Straub 2008).
In their analysis of road concession contracts in Portugal, Cruz, Cunha Marques, and Cardoso (2015) also show that renegotiations are often triggered by lower-thanexpected traffic forecasts.This is often the result of the 'winner's curse' when: a) bidders have limited knowledge of underlying asset values, and b) tendering processes select winning bids with overly optimistic estimates.In such cases, the winning bid exceeds the intrinsic value of the asset.This may lead to unexpectedly low profits or even losses, with winners requesting renegotiations to continue operating the facilities (Thaler 1988;Baeza and Manuel Vassallo 2010).These renegotiations carry high ex-post transaction costs ( (Barthélemy and Quélin 2006;Cruz and Cunha Marques 2013b), and evidence suggests that such renegotiations occur more frequently after competitive bidding, especially if procuring agencies withhold traffic forecasts (Athias and Nunez 2015).However, PPPs initiated via unsolicited proposals or negotiated procedures are not exempt from the winner's curse. 2  Alternatively, PPP actors may pursue value-preserving or value-enhancing renegotiations when faced with significant project uncertainties.For instance, renegotiations can help partners update incomplete contracts to address unexpected exogenous events -a non-trivial issue for revenue risk allocation -and maintain desired investment levels (Roumboutsos and Pantelias 2015;Araújo and Sutherland 2010;De Brux 2010;Cruz and Cunha Marques 2013a;Domingues and Zlatkovic 2015).Abrupt fluctuations in supply prices, interest rates, or regional economic activity can profoundly affect a PPP's financial performance.Examples include the 2008 global financial crisis as well as Argentina's and Brazil's currency devaluations in 2001 and 1999 respectively (Guasch, Laffont, and Straub 2008).Other unexpected events may include earthquakes, storms, wars, riots, and pandemics (Casady and Baxter 2020;Baxter andCasady 2020a, 2020b).
Lastly, both public and private sector partners may pursue PPP contracts in complex political environments without having adequate political support or institutional capacity in place (Saussier, Staropoli, and Yvrande-Billon 2009;Casady and Peci 2021).Public opposition and general confusion often emerge under such complexity, motivating either or both partners to consider renegotiation.Brown, Potoski, and Van Slyke (2018, 743) stress that: [w]hile no contract can account for all the unexpected events that will complicate a long-term project as it unfolds, a contract can incorporate mechanisms that account for inevitable but unplanned stumbling blocks by encouraging the buyer and the seller to work together to address them.Frydlinger, Hart, and Vitasek (2019) suggest adopting "a totally different kind of arrangement: a formal relational contract that specifies mutual goals and establishes governance structures to keep the parties' expectations and interests aligned over the long term".Utilizing mechanisms that foster trust and collaboration, partners can craft 'win-win' rules, build reciprocal relationships, and achieve mutual understanding (Brown, Potoski, and Van Slyke 2016), even when renegotiations are necessary.Yet, ignoring such complexities in PPPs invites problems, as demonstrated by many Spanish renegotiations that arose from standardized contracts which did not account for project-specific characteristics and potential recession scenarios (Baeza and Manuel Vassallo 2010;Ortega, de Los Angeles Baeza, and Manuel Vassallo 2016).
Taken together, the extant literature highlights four primary triggers of PPP renegotiations in transport infrastructure.They are 1) opportunism, 2) the winner's curse, 3) exogenous changes, and 4) contractual complexity.

Research methodology
Using these PPP renegotiation triggers, six case studies were conducted to understand both the onset and outcomes of U.S. highway PPP renegotiation events.These case studies specifically describe: i) evidence available regarding renegotiation triggers in each case; ii) any common experiences with renegotiation triggers and outcomes; and iii) mechanisms employed by state transportation authorities that appear unique to the U.S. market.
Following Flyvbjerg (2006), the authors employed an information-oriented selection approach, to maximize variation in observed renegotiation triggers and their outcomes.The authors selected cases with different project characteristics -road length, infrastructure features (e.g., bridge or tunnel), contract type, award procedure, etc.-as well as renegotiation characteristics-i.e., initiator (public vs. private), objective, and outcome.In addition, the authors accounted for how U.S. PPP experience might vary by jurisdiction (Papajohn, Cui, and Bayraktar 2011;Nguyen, Garvin, and Gonzalez 2018;Casady et al. 2018).The selected cases ultimately included two from the West coast (California), one from the Midwest (Indiana), and three from the East coast (Virginia) (see Table 1).To account for learning curves in PPP delivery (Oliveira et al. 2015), the selected cases also spanned nearly three decades, covering the early 1990s through the late 2010s. 3 To detect systematic patterns underpinning the renegotiations, data was collected on: a) the state's PPP enabling laws; b) project procurement processes, including any competitive bids; c) relevant contractual, physical, and financial characteristics; d) key events affecting the contract, including renegotiations, debt-defaults, and bankruptcy filings; and e) renegotiation outcomes.Data collection then focused on metrics for renegotiation triggers found in the literature.However, since the literature often lacks clear-cut guidance on which triggers cause PPP renegotiations, metrics were selected based on their reliability and explanatory power.Finally, the authors reviewed primary sources, particularly those from project sponsors, for evidence of renegotiation triggers.These included Environmental Impact Statements (EISs), comprehensive agreements, renegotiation documents, official bond statements, news reports, and other public documents.Triangulating multiple sources ultimately improved the data reliability and coding of triggers across cases.For international comparisons, the authors finally looked at experiences in Europe and Latin American, particularly descriptive statistics generated by José Guasch and colleagues.

Measuring opportunism
The literature defines opportunism based on who benefits from renegotiations.Specifically, does the government obtain additional investment from renegotiations, thereby securing benefits at the ballot box?Or does the concessionaire obtain a contract extension or other similar benefits?Following the analysis of Guasch (2004), the authors evaluated: i) which party or parties initiated the renegotiation(s); ii) whether renegotiations reduced or increased investment obligations and for whom; and iii) whether annual fees paid by the concessionaire to the government increased.
Since opportunism remains difficult to measure -it requires knowing the actors' intentions and not simply whether a favourable renegotiation outcome occurred.For the private sector, the authors evaluated whether firms had a prior history of PPP renegotiations, thereby possessing the experience necessary to employ renegotiations strategically.In contrast, the authors considered whether privately led renegotiations signalled internal financial problems rather than opportunistic motives.Project defaults and bankruptcies generally indicate exogenous changes and/or project complexities played a stronger role in renegotiations.When evaluating public-sector opportunism, leadership changes may offer the strongest insights (Guasch, Laffont, and Straub 2007).Changes in public leadership can trigger attempts by policymakers to gain political advantage or protect against such accusations (Olson 2000;Moszoro and Spiller 2012).As a result, the authors identified shifts in political party control over state governorships and legislative chambers during each case period as an indicator of public sector opportunism.

Measuring the winner's curse
Next, the winner's curse may trigger renegotiations when a private company submits an aggressive winning bid but cannot remain profitable.To evaluate the winner's curse, the authors first evaluated whether each bidding process was competitive.If so, the difference between the winning bid and the losing bids was calculated; primary sources (reports, news media, etc.) were reviewed to determine whether contemporary analysts considered the difference to be overly optimistic and therefore suggestive of a winner's curse.However, because parties may unknowingly overestimate the value of an asset in any bidding situation (Varaiya 1988), even firms awarded projects via negotiated procedures from unsolicited proposals may succumb to the winner's curse.While more difficult to determine because market pricing is not available, the authors still investigated if winners were cursed in non-competitive bidding processes.

Measuring unexpected exogenous changes
To account for unexpected exogenous shocks that could trigger PPP renegotiations, the research team used various macroeconomic indicators, including abrupt currency fluctuations and slowdowns in economic growth (Guasch, Laffont, andStraub 2007 de Brux 2010).These macroeconomic shocks were divided into two groups based on their effects on project revenues and costs.The first includes shocks that diminish consumer willingness to pay for toll roads-e.g., large inflation increases, economic downturns, and increases in unemployment.The second includes shocks affecting project profitability, often through increased construction and maintenance costs.The latter includes changes in interest rates (impacting the cost of capital) and changes in input prices (impacting the cost of construction), particularly iron, steel, and construction machinery manufacturing, as measured by the Producer Price Index (PPI).

Measuring complexity
Lastly, project complexities, political environments, and institutional capacities served as potential renegotiation triggers (Hart 2003;de Brux 2010;Iossa and Martimort 2012;Diaz and Gonzalo 2015).More specifically, complex infrastructure designs and contracts may lead to more renegotiations.This complexity was assessed using three proxy indicators: (1) infrastructure type -e.g., greenfield projects are more complex than brownfield projects; (2) contract type -e.g., design-build-finance-operate-maintain (DBFOM) contracts are more complex than design-build (DB) contracts; and (3) contract length -e.g., longer-term concessions/projects must account for more uncertainty over the course of the project lifecycle.
Complex political environments may also increase the likelihood of renegotiation.Such environments often present PPP partners with more numerous and varied public concerns and opposition forces.Because such outcomes vary by project, the authors reviewed news reports to collect information about public opposition, particularly if project officials defended the PPP against opposition from legislators or the public.
Finally, an agency's institutional capacities play a large role in managing both project and political complexities.Whether opportunistic behaviour, exogenous changes, or project complexities trigger renegotiations will depend heavily on public agencies' PPP capacity, preparation, and experience, particularly when a project requires new institutional skills (Gifford et al. 2016;Wei et al. 2022).Such institutional capacity can be assessed by looking at the public sector's infrastructure development capacity and prior PPP experience (Casady et al. 2020;Casady 2021Casady , 2022Casady , 2023)).To measure the former, the authors recorded whether each case was one of the first PPPs implemented by its sponsoring agency.To assess the latter, the authors used the Pew Charitable Trusts' State Management Report Card ratings (Barrett and Greene 2008;Government Performance Project 2005;King, Zeckhauser, and Kim 2004). 4 The authors recognize that complexity may require contract changes for the benefit of both partners (de Brux 2010; Wei et al. 2022), but either or both partners might also exploit complexity, in conjunction with opportunistic behaviour, to gain advantages at the expense of citizens (Bildfell 2018).Such interactions thus complicate distinctions between project complexity and opportunistic behaviour when conducting analyses.

Virginia's Dulles Greenway
The Dulles Greenway, located in Loudoun County, Virginia, covers 22.5 km and connects the Washington Dulles International Airport with Leesburg.Built in 1993 and opened to the public in 1995, Virginia's first modern toll road was procured using a sole source contract following the receipt of an unsolicited proposal under the state's Highway Corporation Act of 1988.The private sector financed the project, with Toll Road Investors Partnership II, L.P. (TRIP II) providing $40 million in equity and private debt covering the remaining $350 million in costs.Under the original contract, facility ownership would revert to the Commonwealth of Virginia after 42.5 years.
Traffic volumes failed to reach expectations when the facility opened in 1995.Early revenues amounted to 20-35% of initial estimates, increasing the risk of debt default, especially as bank prime loan rates increased 50% between 1993 and 1994.TRIP II then sought to increase facility usage with state-approved toll reductions.When revenue failed to reach financially sustainable levels, the project defaulted.In 1997, the partners increased toll rates and raised the speed limit to 65 miles per hour.Two years later, the project restructured its debt and agreed to increase the number of travel lanes from four to six.In 2001, TRIP II obtained a 20-year concession extension (to 2056), and introduced variable toll rates three years later.
In 2005, Macquarie Infrastructure Group (now Macquarie Atlas Roads) bought TRIP II, with 50% of shares eventually being purchased by Macquarie Infrastructure Partners (Macquarie Atlas Roads 2009).In 2013, Virginia granted TRIP II the right to increase tolls annually by one percentage point above the consumer price index.That same year, an effort by the Commonwealth of Virginia to 'buy back' the toll road and lower toll rates failed (Tanner 2013).

Renegotiation triggers
Although the Dulles Greenway procurement did not involve competitive bidding, the original concessionaire overestimated demand and the asset's value, resulting in a winner's curse. 5Because traffic volumes amounted to only 20-35% of initial estimates, the threat of financial insolvency triggered several renegotiations, including toll and speed limit increases, expansion of the motorway from four to six lanes, and an eventual concession extension to 2056.
Public sector opportunism appears unlikely since the public sector did not initiate the renegotiations nor benefit directly from them.As for private sector opportunism, the original concessionaire had no previous experience with renegotiations.On the other hand, the Dulles Greenway faced a default, a debt restructuring, and ultimately, a buy-out.If there was private sector opportunism, it wasn't particularly fruitful for the private partners, especially before 2005.
The case evidence also suggests that, in many respects, complexity was not the primary factor driving renegotiations.The project lacked especially sophisticated components and Virginia demonstrated the strongest institutional capacity ratings during the study period.The Dulles Greenway did, however, represent Virginia's first private toll road since the 1800s, and it was the first constructed under the Highway Corporation Act of 1988(VDOT 2006).
Additionally, exogenous changes, especially rising interest rates and local real estate market downturn, contributed to the renegotiations (Poole 2018).For instance, the project's debt service increased because bank prime loan rates increased 50% between 1993 and 1994, and 100% between 2003 and 2005.

Renegotiation alternatives
A series of renegotiations increased toll rates and extended the original Dulles Greenway concession period, but policymakers also allowed the concessionaire to default and be bought out.

Virginia's Pocahontas Parkway
Virginia's Public-Private Transportation Act (PPTA) of 1995 increased the flexibility of the Highway Corporation Act of 1988, allowing the Commonwealth to evaluate unsolicited proposals from private entities and employ financing tools like tax-free bonds (Commonwealth of Virginia 2012).Under the act, Fluor Daniel and Morrison Knudsen (FD/MK) submitted an unsolicited proposal seeking a PPP agreement for State Route 895, also known as the Pocahontas Parkway, which had been planned and approved since 1983 but lacked construction funds (Wang 2010).Upon receiving the proposal, Virginia set a deadline for others to submit competing offers.An independent review panel consisting of state officials and local industry leaders was then convened by the Secretary of Transportation to review all bids.This panel ultimately recommended to the Commonwealth Transportation Board that the Pocahontas Parkway proceed as planned.The resulting agreement included a four-lane toll road with a 14 km extension, including a 500 m elevated bridge connecting Chesterfield and Henrico counties south of Richmond.
To finance the $354 million project, the Pocahontas Parkway Association (PPA) formed a non-profit corporation (63-20 financing), allowing the project to issue taxexempt debt (Allison 2001;FHWA 2014).Additional financing included an $18 million State Infrastructure Bank loan and $9 million in federal grant funding for roadway design.FD/MK provided $5 million in equity.
When the facility opened to traffic in 2002, revenue amounted to only 45% of expectations (GAO 2004).The early 2000s' economic slowdown likely affected the project by reducing residential growth, thereby undercutting expected demand.With PPA facing default in 2006, Transurban LLC submitted an unsolicited proposal to purchase the project (Samuel 2006), resulting in FD/MK's contract termination, an equity write-off, and a new, 99-year agreement for Transurban, including rights to enhance, manage, operate, maintain, and collect tolls from the roadway.The agreement also required construction of the 3 km Richmond Airport Connector (RAC).The agreement's financial structure included $141 million in private equity, $55 million in subordinated debt, a $150 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan, and $420 million in bank debt.
After 2009, toll increases and declining regional travel demand reduced facility usage; the airport connector's completion did not increase demand enough to cover debt service.In 2012, Transurban wrote off its project equity and planned to turn the toll facility over to its lenders, including TIFIA, before becoming insolvent (Samuel 2013).In May 2014, the private firm DBi Services took control of the road on behalf of the lenders.

Renegotiation triggers
Like the Dulles Greenway, the Pocahontas Parkway procurement did not involve competitive bidding.Yet, despite being an unsolicited proposal, the winners may still have been cursed when revenue amounted to only 45% of expectations once the facility opened.However, the economic slowdown of the early 2000s appears to be the main reason why the project did not meet its expected demand.
As for opportunism, the public sector did not initiate renegotiations, suggesting public sector opportunism played little to no role in this case.Private sector opportunism also appears unlikely since both concessionaires faced clear financial problems prior to their renegotiations.With one concessionaire almost defaulting and the other turning the facility over to its lenders, non-opportunistic motives appear to have triggered the renegotiations.
Project complexity, by contrast, appears more relevant to the Pocahontas Parkway.Although Virginia demonstrated strong institutional capacity during the study period, the Parkway was the state´s first project built under the Public-Private Transportation Act of 1995.It also involved the state's first tax-exempt, non-profit corporation.Other PPPs employing similar non-profit structures, namely the Las Vegas Monorail and the Southern Connector, eventually filed for bankruptcy.This new structure may have introduced incentive problems, driving demand overestimation, because the nonprofit partners lacked skin-in-the-game (Bolaños and Gifford 2018).

Renegotiation alternatives
The most significant renegotiations occurred as part of the private sector buyout in 2006.Policymakers then allowed the project to default, all private equity was written off, and lenders took control of the facility.

Virginia's Elizabeth River Crossings
Under Virginia's PPTA legal framework for unsolicited projects, the state also approved an agreement with Elizabeth River Crossings OPCO, LLC (ERC) to design, build, finance, operate, and maintain (DBFOM) the Downtown Tunnel/Midtown Tunnel/MLK Extension, also named the Elizabeth River Crossings project.Originally planned as a competitive solicitation, ERC -a joint venture between Skanska and Macquarie Group -was the only consortium to submit a conceptual proposal in 2008 6 , prompting VDOT to convene an Independent Review Panel and request the Commonwealth Transportation Board to review the situation.At the approval of VDOT's CFO and innovative finance director, ERC was ultimately awarded the project (Poole 2015), which increased connection capacity between Norfolk and Portsmouth via: a) a new two-lane tunnel supplementing the two-lane Midtown Tunnel, b) improvements to the four-lane Downtown Tunnel, and c) improvements to a 1.3 km stretch of U.S. Route 58.Construction began in 2012, with a $2.1 billion estimated cost and a 58-year concession length.ERC invested $272 million in project equity.Additional financing came from a $465 million TIFIA loan, $308 million in public funds, and $675 million in private activity bonds.The project also included $368 million in toll revenue from the existing tunnels (Guthkelch 2017).
Facing public opposition to tolls on pre-existing facilities, the public sector initiated a renegotiation in 2012 to delay tolling in exchange for a $100 million payment.Then, as tolls were set to begin in February 2014, a newly inaugurated governor renegotiated the contract terms to lower tolls during the first revenue-generating years in exchange for $82.5 million (Virginia Office of the Governor 2014).Vocal public objections arose to tolls planned on the existing tunnels prior to project completion, with opponents claiming the tolls were effectively taxes since there were no viable free alternatives (Reinhardt 2012).A Portsmouth resident filed a lawsuit contending the toll charges were imposed unlawfully, but the Supreme Court of Virginia eventually ruled in the Commonwealth's favour (Meeks 2013).Toll collection at the new rates commenced on 1 February 2014, although a new agreement was reached in July 2015 to remove tolls from the MLK Freeway Extension.This increased Virginia Department of Transportation's (VDOT) contribution from $308 million to $581 million.The fifth and sixth renegotiations, taking place between September 2015 and October 2016, lowered toll rate increases for low-income people living in the Portsmouth and Norfolk areas for 10 years, forcing the concessionaire to absorb $500,000 in annual cost.The project opened in 2017.

Renegotiation triggers
Like the previous cases, the Elizabeth River Crossings project lacked a competitive bidding process.But there was no winner's curse in this instance.Little evidence suggests that exogenous changes affected the project.Private sector opportunism also appears unlikely since the public sector initiated the renegotiations.Might public sector opportunism have triggered the renegotiations?The Elizabeth River Crossings renegotiations took place during the same period that the state senate and executive branch experienced changes in party control.At a minimum, this suggests that a contested political environment existed.On the other hand, the public sector did not request additional investment prior to elections, as expected in the literature.As a result, evidence of public sector opportunism remains inconclusive.
Project complexity, by contrast, appears to be the primary driver behind the renegotiations.The underwater tunnel construction and maintenance requirements were highly complex and expensive.Without sufficient resources to procure the project under traditional delivery methods, the PPP adopted a complex tolling plan to fund it.This tolling plan, in turn, sparked strong public opposition, particularly from low-income neighbourhoods directly affected by the planned tolls.This opposition led directly to the state's successive renegotiations, resulting in toll delays, reductions, and eliminations.

Renegotiation alternatives
In addition to the renegotiations, litigation made project cancellation likely for quite some time.The Metropolitan Planning Organization (MPO) of the region also created a task force in early 2019 to identify resources for buying out the project and eliminating tunnel tolls.Abertis and Manulife Investment Management ultimately acquired the project in 2020 after ERC amended its comprehensive agreement again to delay toll increases until January 2022 and extend the Toll Relief Program through 2037.

California's State Route 91 Express Lanes
Perceiving a need for significant road investments in the 1980s, California enacted Assembly Bill No. 680, allowing PPP use in four demonstration projects.In March 1990, the California Department of Transportation (Caltrans) issued a Request for Qualifications (RFQ) for any proposed projects in the state transportation pilot program.Following the receipt of 13 responses, the state issued a Request for Proposals (RFP) and received 12 different project proposals (with two for the same facility) (Ni 2012).Express toll lane construction in the existing State Route (SR) 91 median, connecting Orange County to Riverside County through a four-lane 16 km extension, was included among the selected projects, as was the South Bay Expressway (see below).The state signed a 35-year build-operate-transfer (BOT) agreement with the California Private Transportation Company (CPTC) in 1990 (Caltrans 2009), who provided $20 million in equity.Additional financing came from a $7 million subordinated Orange County Transportation Authority (OCTA) loan as well as $100 million in bank loans.
The toll lanes opened in 1995, marking the first U.S. road relying completely on electronic toll collection and congestion pricing.However, the agreement's 'noncompete' clause constrained the ability of Caltrans and OCTA to add needed 'competing' or 'complementary' road  After OCTA purchased the lanes, it transformed them into a High-Occupancy Vehicle (HOV) toll road and hired one of PPP concessionaire's team members to operate and maintain (O&M) the facility.OCTA then added an additional non-tolled lane and extended the express lanes an additional 12.9 km to reach I-15 in Corona; the expansion opened in 2017.With this change, the Riverside county transportation agency now co-manages the project (Molina 2011).

Renegotiation triggers
The SR-91 project initially proceeded with a competitive procurement process to identify which private companies were qualified for the pilot program.However, after receiving 12 different proposals, Caltrans selected CPTC to proceed with the development of the SR-91 Express Lanes.Despite this unconventional award procedure, the winner's curse does not appear to be relevant in this case.
As for opportunism, the evidence remains unclear.The public sector showed interest in modifying the agreement to change the non-compete clause and even employed tactics that brought the concessionaire to court.While the literature's usual definition of public sector opportunism revolves around obtaining additional infrastructure investment to increase electoral support, here the same goal was attempted without needing the concessionaire to build or finance the infrastructure.However, in the absence of increasing transportation infrastructure needs in the region, the public sector's actions would likely have not been attempted.What about private sector opportunism?The private sector did not initiate any renegotiations and the concessionaire had no prior experience with renegotiations in other projects.But the private sector was not willing to change its contractual terms, contrary to what the opportunism literature suggests.
Nonetheless, it is still possible this project demonstrates a different, less discussed type of opportunistic behaviour: the hold-up problem.In such cases, one of the partners is unwilling to renegotiate the PPP contract to reap rents from an exogenous and unexpected shock.However, the literature indicates it is difficult to find evidence that proves the hold-up problem exists (Coase 2000;Klein 2007).Ultimately, the case lacks sufficient evidence to convincingly prove a hold-up.
Thus, it appears the main triggers of renegotiation include unexpected exogenous change -the economy grew faster than expected -and project complexity: SR-91 was California's first PPP and the state lacked the technocratic experience for such contracts.Additionally, California held one of the lowest institutional capacity ratings, likely affecting how the procurement process unfolded.

Renegotiation alternatives
Although the public sector failed to overturn the SR 91 non-compete clause through legislation and the courts, OCTA's buyout eliminated the prohibition on developing competing facilities.Additionally, strict non-compete clauses became virtually extinct after the litigation in this case.

California's South Bay Expressway
The South Bay Expressway (SBX) also originated from California´s 1989 Assembly Bill no.680 and was intended to serve anticipated development generated by growing trade with Mexico.The project used a design-build-operate-transfer (DBOT) agreement lasting 35 years and covered a 15 km extension connecting Spring Valley to Otay Mesa in southern San Diego County.Following Caltrans' issuance of a RFQ for those interested in undertaking the project, 13 firms responded.However, rather than shortlisting the firms, Caltrans ended the competitive procurement process at this stage and selected preferred respondents to develop four different projects in the pilot program (PFAL 2016).The state ultimately signed a franchise agreement with California Transportation Ventures, Inc. (CTV) in 1991 for SBX, but the project experienced several delays.
First, the private partner agreed to manage the environmental permits but did not obtain the requisite permits until 2001, a ten-year delay.Environmental agencies also imposed requirements including wetlands restoration, protected habitats for endangered species, and recreational improvements in nearby communities.Parsons Brinckerhoff sold its stake to Macquarie Infrastructure Group in 2002 after the permitting delay.A renegotiation then took place, allowing Macquarie to access public funds to offset costs from construction delays and environmental permitting.This included $140 million from TIFIA, $130 million in private equity, and $400 million in bank debt.In addition, environmental impact-related design changes complicated the Otay River Bridge construction and introduced requirements that could not be met on schedule (Soule and Tassin 2007).This led to litigation between CTV and a subcontractor, with the resulting litigation costs eventually pushing the SPV into bankruptcy.The bridge's issues ultimately delayed the project's opening by over 15 months and raised costs from $400 million in 1990 to $635 million upon opening in 2007.
Finally, the project opened just as the subprime mortgage crisis hit San Diego, reducing demand to about a third of expectations and leading CTV to file for bankruptcy in March 2010 (Evans 2010).After creditor settlement, the U.S. Bankruptcy Court created New SBX Equity, owned by all the creditors.Federal government claims were reduced from $170 million to $99 million and bank claims were reduced from $361.4 million to $210 million.The federal government received roughly $93 million from toll revenues, retaining 32% ownership and sharing any surpluses.The San Diego Association of Governments (SANDAG) ultimately bought the new partnership, paying the banks $247.5 million in cash and extinguishing private sector participation.SANDAG also swapped TIFIA´s equity and debt for a $94.1 million note, a $1.4 subordinate note, and $15.4 million in cash (Hawkins 2011;Jensen 2011;FHWA 2018).Following the acquisition, SANDAG decreased toll rates by 40%, resulting in a 20% revenue reduction (Poythress 2012).TIFIA expected to recover '100% of the original loan balance' (U.S. DOT 2016), and repaid all TIFIA debt by November 2017, but the amount of foregone accrued interest remains unclear.

Renegotiation triggers
Like SR-91, the SBX's competitive procurement ended after the RFQ stage and the resulting renegotiations were not triggered by a winner's curse.Opportunistic behaviour was also not a renegotiation trigger.The case's only renegotiation allowed a new concessionaire to step in after the incumbent discontinued its involvement in the project.Since the project ended in bankruptcy, motives other than private sector opportunism drove the renegotiation.Public-sector opportunism appears equally unlikely.
Instead, exogenous events and project complexity were the key renegotiation triggers.SBX opened the same year as the subprime mortgage crisis and the Great Recession, both of which greatly impacted California.Increased iron and steel prices also showed high volatility during the construction period.In addition, SBX encountered strong political opposition from several sources, including the Professional Engineers in California Government (PECG)-a union of state engineers -and environmental groups.Opposition and lawsuits from conservation organizations also began following the Draft Environmental Impact Report/Statement (DEIR/S) in 1996 (Technology 2011; Giuliano et al. 2012).Additionally, federal agencies imposed considerable requirements to minimize the project's impact on its surroundings, ultimately generating construction delays and subsequent litigation that drove SBX to bankruptcy.

Renegotiation alternatives
After many years working to obtain the requisite permits, the first concessionaire chose to withdraw from the project.By then, the public agency could have taken over the project, but renegotiation offered a way to retain the original concessionaire or attract a new concessionaire, as was the case in the Pocahontas Parkway.Here, a new concessionaire took over SBX.When the project faced unexpectedly high costs and low demand, policymakers let it declare bankruptcy.As a result, the court reorganized SBX's financial structure, leaving the company in the hands of its creditors, and SANDAG ultimately purchased the contract.

The Indiana Toll Road
Funded by tolls through a legal framework established in 1951, the Indiana Toll Road (ITR), originally named the Indiana East-West Toll Road, opened in 1956.As part of the U.S. Interstate Highway System, ITR covers 251.5 km and connects Chicago, Indiana, and Ohio.In 2005, Indiana launched an RFP to lease the ITR so the state could extract value from the asset and reinvest in the transportation network (Casady and Richard Geddes 2020).Following a two-stage procurement process (i.e., restricted procedure), Indiana qualified a select number of bidders to submit preliminary, nonbinding bids for evaluation, subject to due diligence.After soliciting four final and binding bids, Indiana awarded maintenance, operations, and toll collection rights to the ITR Concession Co. LLC joint venture in 2006.The 75-year contract included highway O&M and additional lane construction along 16 existing road kilometres.The winning bid was $3.8 billion, including $748 million in equity and $3,248 million in debt.The deal allocated $255 million to the seven counties adjacent to the toll road, $250 million to lane expansion, and $40 million to electronic toll collection.An additional $150 million was distributed to Indiana's 92 counties for road improvements (Gilroy and Aloyts 2013).
The deal raised considerable public opposition, suggesting the state would see short-term gains in exchange for private firms profiting at the expense of long-term citizen welfare.However, the joint venture faced a $260 million loss in 2010, with expectations for debt service default by 2012 (Holeywell 2011).Given growing debt service concerns in 2013 and 2014, the participants began renegotiations with their lenders (Glazer 2014).
In total, five renegotiations occurred between the ITR's public and private actors.First, in exchange for state reimbursement ($60 million), the concessionaire agreed to a 'toll freeze' in 2006 until electronic tolling became operational.That same year, the state also agreed to an investment obligation reduction and, in 2007, the state agreed to delays on certain investments until 2010.The state agreed to additional reimbursements ($60 million) in 2008 due to lost revenue associated with electronic tolling and, in 2010, delayed other investments until 2011.In September 2014, ITR Concession Co. LLC filed for bankruptcy because the project's interest rate swaps, a condition imposed by the lenders, increased its debt by $2.15 billion (Benman 2014).The Federal Reserve's policy response to the Great Recession lower interest rates, in contrast to precrisis expectations, thereby negatively impacting ITR's financials.In addition, the Great Recession impacted demand, with truck demand totalling just half of expectations.In May 2015, IFM Global Investors purchased the remaining 66-year toll road concession from bankruptcy for $5.725 billion, using $2.5 billion in senior debt and $3.2 billion in equity (Reinhardt 2015).

Renegotiation triggers
While the ITR represented Indiana's first PPP, it was a brownfield project.As a result, project complexity did not trigger renegotiations.Opportunistic behaviour also appears unlikely.The renegotiations were not initiated by the public sector, suggesting little public sector opportunism.On the other hand, Ferrovial/Cintra had participated in international highway PPP projects that experienced renegotiations and requested ITR renegotiations.The project ended in bankruptcy, however, so non-opportunistic motives mostly likely drove the renegotiations.
Although the case involved competitive bidding and a high winning offer, the evidence does not indicate a winner's curse.During the ITR's bidding process, the winning bid was $3.8 billion.This differed significantly from the competing bids of $2.8 billion, $2.5 billion, and $1.9 billion respectively (IFA 2013).This overvaluation initially suggests the winner's curse may be a plausible explanation for the project's renegotiation, namely as a bankruptcy avoidance measure.However, when the project emerged from bankruptcy, it was purchased for $5.7 billion.This even larger price undercuts the argument that ITR's original winning bid overestimated the asset's value.
Instead, exogenous events were the strongest renegotiation trigger.In 2007, banks conditioned their ITR loans on an interest rate swap designed to protect the project against rising interest rates.Unfortunately, policy responses to the Great Recession drove interest rates below 2007 levels, putting the project under financial stress, leading to its 2014 bankruptcy.At that time, the interest rate swap amounted to $2 billion in debt.The Great Recession also dampened demand for the toll road during this period, further stressing the project's financials.

Renegotiation alternatives
In ITR's case, renegotiations attempted to delay or avoid bankruptcy.Nevertheless, policymakers allowed the project to go bankrupt and be bought out.

Discussion
Table 2 summarizes the case findings.The findings indicate the winner's curse was relevant in only two cases, the Dulles Greenway and Pocahontas Parkway.Despite being awarded as unsolicited proposals, these projects demonstrated significant demand overestimation, leading to unrealistic asset valuations.While the other cases, including those with competitive bidding processes, show little evidence of overvaluation driving renegotiations, these two projects illustrate the winner's curse can occur in any bidding situation (Varaiya 1988), even in negotiated award procedures.
Next, public sector opportunism was not a major regeneration trigger, except in the case of SR-91.For most cases, the public sector either did not initiate renegotiations or other non-opportunistic factors played a much stronger role.Similarly, the case findings offer little evidence that the private sector pursued renegotiations to extract rents from the public sector.It remains possible, although unproven, that a different type of opportunism (i.e., the hold-up problem) occurred in SR-91.In such cases, one party maintains the contract as written to extract rents from the other.If this hold-up problem exists in other PPP projects, opportunism might be more prevalent, and harder to detect, than expected.
The case studies also provide ample evidence that exogenous shocks and project complexity trigger renegotiations in the U.S. transportation PPP market, sometimes in conjunction with other factors.Exogenous economic shocks were evident in the Dulles Greenway, Pocahontas Parkway, SBX, and ITR, where economic downturns and unexpected interest rate changes affected project financial performance.Partner inexperience, technical complexity, and complex and adverse political environments, in turn, created challenging circumstances that triggered renegotiations.
Specifically, the public sector's limited technocratic experience writing and managing complex PPP contracts created situations that necessitated renegotiations in several cases.SR-91's issue with a non-compete clause promoted agencies to design contracts that limited a concessionaire's ability to challenge new competing facilities.The use of a tax-exempt, non-profit corporation in the Pocahontas Parkway also proved to be problematic in two additional PPP projects-i.e., the Las Vegas Monorail and Southern Connector, leading to their bankruptcies.Public opposition to tolling (ERC) and environmental concerns (SBX) also show how PPP project complexities can drive renegotiations.
These findings shed light on how PPP renegotiations arise in the U.S and indicate America's highway PPP market has distinct renegotiation triggers.The case evidence suggests opportunism plays a very limited role in U.S. PPP renegotiations compared to other markets.The eventual bankruptcy of concessionaires who requested renegotiations shows that renegotiations were motivated by real financial problems rather than opportunistic behaviour.This suggests that the U.S. has institutional characteristics that minimize incentives for opportunism.Finally, the second research question focuses on how America's unique institutional setting may help policymakers manage these renegotiation triggers.The literature on other countries recognizes several alternatives to renegotiation, namely: i) early contract termination due to poor performance (e.g., nationalization); ii) debt default followed by financial restructuring; and iii) bankruptcy, followed by early contract termination.The six cases analysed in this study demonstrate that renegotiation offers just one of many potential outcomes from a triggering factor.In addition to the options outlined above, the U.S. public sector, when facing a PPP renegotiation trigger, can also: i) let another entity -either a different private company or a different publicsector agency -purchase the PPP contract to change the project's management and technical skills (e.g., SBX in 2002, Dulles Greenway in 2005, and Pocahontas Parkway early in 2006); or ii) allow the project to file for bankruptcy so debt-holders can change the project's financial setup and continue operating under the administration of creditors.Creditors can then hire a firm to manage the project (e,g, Pocahontas Parkway in 2014), sell the project to a local government (e.g., SBX in 2011), or sell the project to a private company (e.g., ITR in 2015).
Consequently, these six cases show that certain U.S. institutions may help public agencies avoid opportunism in their PPP projects.Specifically, U.S. bankruptcy law, active capital markets, and a federalized government structure likely create conditions that limit the power private concessionaires have in renegotiations.U.S. bankruptcies also use a Chapter 11 mechanism that allows projects to continue operating during financial restructuring (Bolaños, Gifford, and Kweun 2019).Unable to leverage facility operations by threatening closures, the private sector has little room to manoeuvre.By facilitating debt reduction, U.S. Chapter 11 bankruptcy also makes buyouts more attractive, making it easier for the public sector to attract new concessionaires.America's active capital market further supports such buyouts on the private side (e.g., ITR); the U.S'.s multi-level, federalized system of government also enables similar buyouts by sub-national governments (e.g., SR-91, SBX).These institutional structures attract different risk-appetites and risk-management profiles compared to other regions, overcoming concerns regarding lack of competition in PPP renegotiations (Guasch 2004).As a result, policymakers may benefit from evaluating the over-arching institutional framework that extends beyond transportation agencies to include bankruptcy laws, active capital markets, and other macro-institutional dimensions supporting PPPs (see, e.g., Verhoest et al. 2015;Casady et al. 2020;Casady 2021Casady , 2022Casady , 2023)).

Conclusion
Conducting a comparative case analysis of six U.S. highway PPP projects, this study found the primary triggers of PPP renegotiations are both organizationally and institutionally-oriented, namely contract complexity (i.e., procurement process novelty and intricacies of risk allocation in incomplete contracts) and exogenous shocks (i.e., outside opposition, macroeconomic disruptions, etc.), Compared to other countries discussed in the PPP literature, renegotiations in the U.S. market do not appear to be driven by opportunism and less so by the winner's curse.The findings do suggest, however, that future research should consider the hold-up problem as a potential challenge in PPP contract preparation, procurement, and management.
These findings suggest U.S. policymakers have access to additional alternatives that help them manage renegotiation triggers.Countries usually have just three alternatives to renegotiations: debt default; bankruptcy followed by government nationalization; and early contract termination.In the U.S., the public sector may also: i) let the PPP contract be bought out by a different private company or public sector agency; and/or ii) allow the project to file for bankruptcy and undergo debt-restructuring without service interruption.These alternatives weaken incentives for opportunistic behaviour by maintaining facility operations and minimizing the sponsors' financial involvement.
Taken together, these findings offer clear theoretical contributions to the PPP renegotiation literature as well as practical contributions for the ongoing management of renegotiations, particularly in Europe and Latin America.Other countries may stand to benefit from avoiding state guarantees in their PPPs and instead let contractors run the risk of going bankrupt or be subject to buyouts.After all, this ensures the private sector is bearing the risk it agreed to in the project.Vecchi et al. (2022) further note that guarantees create moral hazard in the bidding process and exacerbate contractual renegotiations, resulting in losses for taxpayers.This is especially true when public sector capacity and institutions are weak.Thus, public sector competency is a crucial component of effective renegotiation management.
Yet, this study is just a preliminary assessment of U.S. PPP renegotiations.PPP projects typically involve long-term contracts in dynamic markets and different triggers may become more or less relevant with time.Additionally, public information is often limited, demanding continuous hypothesis testing and redevelopment as more information becomes available.The PPP market's evolving nature and information scarcity further highlights the need for additional theoretical and empirical research to a) understand the many different institutions involved, b) develop stronger measures, and c) collect more comprehensive data sets from which to draw robust causal insights.Additional discussion surrounding opportunistic behaviour and its evidence, particularly regarding the hold-up problem, may be especially useful with future research.

Notes
1.In PPPs, actors behave opportunistically by pursuing renegotiations in response to opportunities to extract rents.2. In these situations, without a competitive procurement, it is more difficult to assess whether the winning 'bidder' exceeded the intrinsic value or true worth of the asset.3.As of Oct. 2019, there were 50 PPP projects listed by the FHWA as under construction of in operation, split between DBFOMs and Long-term leases (LTLs).The cases selected in this study represent roughly 12% of all US transportation PPP projects and 16% of all those completed/in operations.4. This report card uses state-by-state information, analysis, and tools to grade the management of all 50 states along four categories: Money, People, Infrastructure, and Information.These grades can be found in the February issue of Governing magazine.The project is funded by The Pew Charitable Trusts.For more information, see: https://www.pewtrusts.org/en/projects/archived-projects/government-performance-project.
5. Poole (2018) notes that Virginia DOT also found money to widen and improve Route 7 and Route 28.Traffic and revenue forecasters had assumed (but not been guaranteed) this would happen.6.This was a bit surprising because the initial Request for Information in 2004 drew three serious responses and more than 50 companies attended VDOT's informational meeting in 2006.
capacity.OCTA attempted to abrogate the clause, but the courts did not accept its safety-related arguments.The California government also endeavoured to bypass the non-compete clause and attempted to acquire the facility legislatively through condemnation via Assembly Bill 1091 in March 2001 and Assembly Bill 1346 in May 2001.None of these efforts succeeded.To reduce traffic congestion, OCTA eventually purchased the facility from CPTC in 2003 for $207.5 million, issuing $195 million in toll revenue bonds (Metro ExpressLane 2014; Emily, Gómez-Ibáñez, and Casady 2019).

Table 2 .
Case studies and renegotiation triggers.