Within the framework of a public-private partnership (PPP) operation, the rebalancing of the Economic-Financial Plan (PEF) represents an exceptional measure that the Concessionaire may invoke only when it incurs additional costs or losses due to extraordinary and unforeseeable events, which are in any case not attributable to its responsibility. The purpose of the procedure is to restore balance through the use of the economic-financial indicators identified in the concession agreement; the procedure can only be activated to the extent strictly necessary to neutralize the effects arising from the aforementioned disruptive events. The rationale of this mechanism lies in the need to preserve the sustainability of the concession and, consequently, the continuity of the public service.

In this contribution, we will present the technical and procedural method for rebalancing (based on the use of the concession PEF) which, in our opinion, should be followed and, consequently, should be thoroughly incorporated into the concession agreement. In particular, we will focus on a controversial aspect that sometimes creates disagreements between the parties to the concession: whether the original concession PEF should be fully updated at the time the event triggering the procedure occurs, or whether it should only reflect the economic effects of the disruptive event, without altering any other original assumptions, premises, or data. Clarifying this point is important because, as we have observed, conflicting interpretations can effectively block the initiation of the procedure, with easily understandable consequences.

Before delving into the analysis, it is useful to consider the concept of economic-financial balance in a PPP, as it determines the feasibility of such operations. This concept is described in paragraph 5 of Article 177 of Legislative Decree 36/2023 and subsequent amendments (the Public Procurement Code) as “the simultaneous presence of economic convenience and financial sustainability. Economic-financial balance exists when the expected project revenues are sufficient to cover operating and investment costs, to remunerate and repay debt capital, and to provide a return on equity capital.”

The project underlying the concession must therefore be economically advantageous and capable of generating, on a regular basis, sufficient cash flows to cover costs, repay debt, and remunerate the invested capital. The overall suitability of a PPP is measured and certified by specific indicators set out in concession agreements, typically including: (i) economic convenience indicators such as the Internal Rate of Return (IRR) and Net Present Value (NPV), and (ii) financial sustainability indicators such as the Debt Service Cover Ratio (DSCR) and the Loan Life Cover Ratio (LLCR).

The “balance” of the concession must be maintained throughout its duration and, if necessary, restored upon the occurrence of extraordinary disruptive events. It is now established that the “restoration” of the previous balance must be pursued by adopting economic measures capable of returning the agreed-upon economic and financial indicators (which the parties contractually assumed as benchmarks) to the levels set out in the original concession PEF, while keeping operational risk with the Concessionaire.

This requirement is codified in the current Public Procurement Code, Article 192, paragraph 1: “Upon the occurrence of extraordinary and unforeseeable events, including changes in applicable laws or regulations, provided they are not attributable to the Concessionaire, which significantly affect the economic-financial balance of the operation, the Concessionaire may request a revision of the contract to the extent strictly necessary to restore the balance and risk allocation agreed upon at the time of contract execution. Alterations to the economic and financial balance caused by events other than those referred to above, which fall within the risks allocated to the private party, shall be borne by the private party.”

Turning now to the mechanics of the rebalancing procedure, it is useful to refer to Article 32 of the so-called MEF Standard Concession Agreement (outlined in the “Guide for Public Administrations for drafting a concession contract for the design, construction, and management of public works under PPP,” approved by ANAC Resolution No. 1116 of 22 December 2020 and by the General State Accountant’s Determination No. 1 of 5 January 2021). This standard agreement has become a widely cited and referenced benchmark in the sector.

It is important to note that the procedure set out in the MEF Standard Agreement relies exclusively on the PEF, consistent with its central role in the concession relationship. Typically, it is the Concessionaire who initiates the rebalancing procedure, which obliges the granting authority to commence the review process (see Council of State – Section VII – Judgment No. 7200 of 24 July 2023).

Article 32, paragraph 3, of the MEF Standard Agreement clearly outlines the documentation required to initiate the procedure, requiring the Concessionaire to specify: “…the assumptions that led to the alteration of the economic-financial balance and to provide the following supporting documentation:
a) Disequilibrium Economic-Financial Plan, in editable format (this is the original concession PEF with the direct effects of the disequilibrium event recorded);
b) Revised Economic-Financial Plan, in editable format (reflecting the effects of the measures necessary to restore the original economic-financial balance; for example, extending the concession term, revising tariffs, granting public contributions, or a combination of these measures. The quantitative dimension of the measures must aim to precisely restore the economic-financial indicators);
c) Explanatory report of the Revised Economic-Financial Plan, detailing the causes and assumptions leading to the revision request and the resulting additional costs;
d) Draft amendment to incorporate the Revised Economic-Financial Plan into the concession agreement.”

Although the procedure appears clear and linear, confusion persists. Some argue that the original PEF must be fully updated (revenues, costs, investment values, etc.) before registering the disequilibrium event. Implementing such a full update is, as any experienced professional knows, extremely difficult and risks arbitrariness, especially in projects without a special purpose vehicle whose financial statements could serve as a reference.

In any case, fully updating the PEF for rebalancing purposes is inappropriate, as it would inevitably alter the original benchmark ratios established in the contract, undermining the objective method for determining the precise economic measures necessary to restore balance. Arbitrary modification of the contractual PEF would disrupt the agreed reference framework for the concession’s entire duration. Best practice dictates that the procedure must respect the principle that only the assumptions affected by the triggering event should be modified in the disequilibrium PEF. The disequilibrium PEF must, therefore, be the original one attached to the concession agreement as an integral part.

The explanatory notes of the MEF Standard Agreement are explicit on this point, specifying that “for rebalancing purposes, only those cost and revenue values affected by the event triggering the rebalancing procedure should be modified in the PEF.” For these reasons, we recommend that the rebalancing methodology be analytically described in the concession agreement (with particular attention to the definition of the “disequilibrium PEF”), providing a conventional solution capable of ensuring timely and effective management of disruptive events and mitigating the risk of disputes between the parties.