Concession Contract Renegotiations: Some Efficiency vs. Equity Dilemmas

Abstract

If having firm-driven renegotiations of contracts for infrastructure services is a major concern, efficiency should not be the only consideration in selecting an operator. Indeed, consumers may want to award the concession to a less efficient firm if that would reduce the probability of renegotiation.

Estache and Quesada analyze the possibility of tradeoffs between efficiency and equity as well as the possibility of distributional conflicts in the context of renegotiation of infrastructure contracts in developing countries.

To do so, they present a model in which contracts are awarded by auctioning the right to operate an infrastructure service to a private monopoly, and consider the possibility of renegotiation. To identify the potential sources of tradeoffs, they track the possible outcomes of different renegotiation strategies for the monopoly running the concession and for the two groups of consumers - rich and poor - who alternate in power according to a majority voting rule.

Among the model's most important policy implications is this: if having firm-driven renegotiations is a major concern, efficiency should not be the only consideration in selecting an operator. Indeed, consumers may want to award the concession to a less efficient firm if that would reduce the probability of renegotiation, since a lower probability of firm-driven renegotiations (due to demand shocks, for example) is associated with higher welfare for all service users.

This paper - a product of the Governance, Regulation, and Finance Division, World Bank Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation. The authors may be contacted at [e-mail] or [e-mail].

JEL Classification: D82, L51, D39