Negotiating Deals to Resist Unraveling

Technical Notes

Nov 20, 2009 — Neil Boyle

PPP infrastructure contracts are notoriously unstable; projected break even supply prices are frequently greater than contracted prices. The disparity is due to the unrelieved contract hazards that were glossed over during negotiations. When unrelieved hazards arise, specialized assets forego safeguards and end up exposed.  Unstable contracts are apt to revert to a simpler technology or to one that is more complex depending on the circumstances. Such unstable contracts create transaction environments that lack credible commitment. Without credible commitment, contracts with price disparity are likely to unravel at the slightest shock, such as civil unrest or activism against foreign investment and investment volatility. Preventing price disparity is a matter of acquiring the knowledge and skills needed to detect hidden contract hazards and to mitigate or safeguard against those hazards ex-ante during negotiations and ex-post during implementation when they unexpectedly arise.

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