Examples of Negotiated Safeguards

Technical Notes

Dec 15, 2009 — Neil Boyle

A condition of complete safeguard occurs when hazards are relieved. Negotiated safeguards could include a broad range of institutions and mechanisms that are inserted into the contract and if required also into the internal organization of the project company. The thing to keep in mind is the importance of knowing what principles underlay the safeguard design. With the principles firmly in mind, creative solutions are facilitated. A sample of safeguards follows:

  1. Spell out in detail the terms and conditions of the rules of adaptation and risk mitigation cost sharing concerning claims made by either party;
  2. Establish the condition to create an adaptive sequential decision-making structure that ensures adaptation and gap-filling machinery are in-place for contract parties when needed;
  3. Raise the issue of changes in incentive structures in privatized state-owned enterprises and introduce safeguards against any diseconomies;
  4. Raise the issue of incentive differentials between the public sector government buyer and the private sector supplier and introduce safeguards against any diseconomies;
  5. Post own hostages such as a performance bond to signal credible commitment to the other party;
  6. Change the benefit/cost calculus of the counterparty where a net gain is achieved by offering technical assistance to resolve an important problem the counterparty is unable to tackle for various reasons;
  7. Require self-enforced payment such as an off shore escrow account of a penalty for failure to achieve an agreed performance outcome;
  8. Name a government project unit as accountable and make this information public and subject to public scrutiny and oversight through monitoring by a civil society NGO;
  9. Realign incentives by giving and receiving credible commitment by negotiating price, technology, and governance structure simultaneously, as production cost savings and governance go together and constitute the main ingredients of efficient trade-offs;
  10. Introduce trading regularities that support and signal continuity intentions;
  11. Constrain the conditions of supply or procurement;
  12. Consider contractual safeguards before attempting to remove a transaction from the market and vertically integrate it;
  13. Adopt franchise bidding procedures only where monopoly pricing is feared and include protection of not just an efficient bid price but also an efficient supply price by safeguarding against the hidden ex-post risks of incentives changing due to small number exchange supply relations and the opportunism that accompanies it;
  14. Bind autonomous contracting parties to actions of a joint profit maximization kind to safeguard against the high cost of strategic bargaining;
  15. Make use of collective organization where reputation effects can be accurately and reliably recorded and experience can be shared among interested parties (e.g., supplier associations);
  16. Adopt contingent compensation in specific situations;
  17. Adopt frequent adaptation of employment contracts to restore positions on the contract curve;
  18. Make use of credible threats that comport with the investment that supports those threats.

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