How Humans Function in the PPP Framework and their Role in Positive Science


Sep 2, 2017 — Neil Boyle

A Working Framework of PPP Organization– This description of the Water Supply and Sanitation organization system is a heuristic that helps explain how economic organization enables positive science, as well as helps to optimize the cost of governing the system. Its special features are due to its discovery by a distinguished organizational theorist by the name of Chester Barnard of Harvard and the General Motors Corporation (GMC).

We know from the nine Philippine cases and the economic literature that PPPs operate in a problematic dynamic  of constant incomplete contracting whose survival depends on the “maintenance of equilibrium of complex character…[This] calls for readjustment of processes internal to the organization…,[whence] the center of our interest is the processes by which [adaptation] is accomplished”. (Barnard, 1938:6, emphasis added)

The main case of economic organization is “economizing”.  The principal concern is the efficiency of running the water supply system (taken organizationally and production wise) by focusing on the efficiencies of transactions and economic organization rather than on composites of goods and services, which are left to the production side of the framework.

We are more concerned with tracing out the ramifications of bounded rationality. Greater respect is required for organizational (as against technological) features and for efficiency (as opposed to monopoly) concerns.  (Williamson, 2005)

Definition and Use of Contract – We define the contract as a triple comprised of (p) the price of the transaction, (k) the asset specificity of the asset that is exchanged between the buyer and the supplier of the transaction, and (s) the specialized safeguard that protects the contract from modification of any kind, along with quantity, quality and duration of the contract.  The contract triple is fully interactive, therefore the contract should be negotiated simultaneously and negotiation should be viewed in its entirety, i.e., in relation to ex ante project preparation objectives and ex post contract and project implementation objectives. (Williamson, 1996)

This does not change the legal definition of contract.  The value of this definition will become apparent as we move through the narrative.

How humans function in the PPP framework and their role in empirically enabling positive science- The two assumptions of human behavior (bounded rationality and opportunism) are timeless, they cut across time, space, and complexity; they are true in Japan as they are in the U.S. Yet they are contextual and vary with local conditions.  Neither works directly on the economic agent, rather they work through uncertainty in the case of bounded rationality, and through small number exchange in the case of opportunism. This is how Williamson was able to skirt the issue of randomness of positive science that stymied the economic profession for almost two and a half centuries. Thus, integrating man via the twin assumptions of human behavior into the economic framework created “intervening variables” instead of the independent variables as was expected for over two hundred and forty years of economic theory.

Uncertainty and small number exchange are technically called objective market properties and because of the way they work, human subjectivity is beside the point from the perspective of a third-party (e.g., society in general)  unless informed by the economics of the situation. This is true except with the person who finally supervises and writes the clause that provisions the contract in support of economizing a transaction.  But even here, the subjectivity is insignificant.  The clause that is written by the supervisor is a testable proposition or refutable hypothesis that will be monitored and tested for effectiveness, “to separate the chaff from the wheat”.  (Williamson, 1996)  Uncertainty affects bounded rationality and worsens its steady state condition.  The agent’s limited cognitive capacity thus is heightened and the agent acts less efficiently and effectively.  Hence, uncertainty is contextual and so is local culture, which should be codified in the local codes of conduct and provisioned contractually. (See below.)

The same is said about small number exchange and opportunism.  When there is a situation where the two are joined, such as immediately after contract signing, and the PPP project company begins to take shape informally, there are fewer opportunities for transparency.  Hence, a small number exchange affects the steady state condition of the agent’s tendency to act in a guileful self-interestedly manner, especially when an opportunity for private gain is present. The opportunism of guileful self-interest therefore is worsened and the agent acts increasingly guileful, hence disruptions increase.  Like uncertainty, small number exchange is contextual and local culture related to the small number exchange situation should be codified in the local codes of conduct.  The take away of the above accounting for human behavior is that insertion of bounded rationality and opportunism into the analysis is a workable proposition that can have profound operational implications that are quantifiable and replicable through a provisioned contract.

How culture is factored in – Codes of cultural conduct should be memorialized in the institutional environment, the “rules of the game”.  For example, in the Philippine cases, “the fixer” is a cultural icon in bureaucratic life, yet none of the 9 projects reported fixers’ being a part of their operations. (ESWIF2, 2014:___)

Brief description of the framework – Barnard’s description of the General Motors Corporation fits appropriately with the operations of the nine WSS projects in the Philippines. What is to be empirically proved is the authenticity of the framework.This is done by seeking and achieving relief through equilibrium by negotiating the contractual triple of price, asset specificity, and safeguard to be tested, but observation tells us equilibrium has been reached in the project: For all intents and purposes, the transaction price, the specificities of the exchange assets, and the safeguards of the contractual agreement are in harmony with one another; the principals, the agents, and the consumers are pleased with the project such that the nine utilities achieved international standards.

The progression of a process of disturbance to the economic system proceeds as follows. A utility’s contract is incomplete, therefore it is complex. When incomplete contract is joined with a specialized exchange-asset and uncertainty, bilateral dependency sets-in between the two principals and disturbances occur in their decisions and relations. The transaction in-its-entirety, therefore is affected due to forward looking agents, meaning decisions by them tend to reject the ex ante incentive alignment interval, as well as the ex post implementation interval. These disturbances result in opportunism of various kinds. These disturbances can be taken for granted. (Macher and Richman, 2008) This fact, therefore, eliminates contingency-claims contracting and hence decision theory and vastly reduces the time it takes for economic analysis.

The progression of a process of adaptation to a change in circumstances proceeds as follows.   A problem is detected and an explanation is attempted as the start to fixing the problem. Diagnosis begins with the generation of a refutable hypothesis that the triple is in disequilibrium and the contract is unstable as the cause of disequilibrium.  With an unstable contract and a triple that is in disequilibrium, the solution is to bring the components of the contract triple into equilibrium. This is accomplished in one of two ways: 1) renegotiations during the ex-post implementation interval;  or 2) by following a process of conflict resolution in-its-entirety where conflict is generalized to include any problem that arises between parties that holds-up the continuation of work on any basis. Renegotiation without the moral hazard of lowball bidding at the outset of the ex-ante interval is possible only if renegotiation occurs not in its entirety but only during the ex-post implementation interval, and then, only if price changes are permitted through intense verification of asset specificity (k) and safeguards (s) as the true rationale for price changes.

For the contemporary practitioner, however, the framework is counterintuitive. It is not readily apparent without preparation.

The human face of the PPP organization

The case studies tell us how important it is to streamline the WSS PPP sector in the Philippines in operational terms with what we know scientifically about people.  For instance, we know little about the two fundamental characteristics of people that cut across all human beings:

                a)          that man is “rational but limitedly so” (Simon, 1961:xxiv) meaning all men are limited cognitively.  Simon called this bounded rationality.  Taking bounded rationality to its conclusion, the unavoidable outcome is that all complex contracts are incomplete. (Williamson, 1996:6) Complex contracting will be discussed subsequently; and

                b)          that man acts on the basis of self-interest with guile, not all of the time, but most of the time because it occurs within organizations regularly and because the cost of verification is prohibitive.  Williamson called this opportunism.  (1996:6) Taking opportunism to its conclusion, not all contracts-as-promise are self-enforcing because they are vitiated by opportunism.  (1996:6)  Contracts-as-promise are of the market kind, “sharp in by clear agreement, sharp out by clear performance”. (Macneil Ian, 1974) The same is said of individual promises.  But, as we have learned not all contracts are of the market kind, and classical contract law guides not all of the legal doctrines of markets.

Tags: , , , , ,

This article is filed in articles. Start or participate in a discussion below or click here to see more articles in this category.


Please share your thoughts and comments about the article. We look forward to hearing from you. Fields marked with "*" are required: