Toll highways in financial distress: The winding road to terminate the contracts

Abstract

Spain has extensive experience in the promotion of toll highways through contractual public private partnerships (PPPs) in the form of concession contracts. The Central Government has awarded thirty-two contracts since 1967, fourteen of them in the last two decades. Over time, Spain has been developing a broader legal framework to regulate these contracts. However, in 2013, nine out of the fourteen toll highways awarded between 1999 and 2006 filed for bankruptcy after years of financial distress. Most of these projects had been in operation for less than eight years and were severely affected by optimistic estimates of traffic demand and the economic crisis of 2007. Given the imminent termination of the contracts, the government, the concessionaires and the financial institutions began to position themselves strategically, and adopted different measures to safeguard their own interests. Their decision-making has been highly motivated by a legal provision —known as State’s Financial Liability— that guaranteed a termination payment to the PPP contractor in case bankruptcy was not attributable to the private sector. This research shows the causes that motivated the bankruptcy of the contracts, and studies the strategical behavior of the different stakeholders involved according to their specific interests. From this case study, some lessons are provided on the correct way to design termination clauses in PPP contracts with the aim of safeguarding good service to the user while, at the same time, avoiding opportunistic behavior.