Negotiating Superior Safeguards

Technical Notes

Dec 15, 2009 — Neil Boyle

Negotiations calls for smarter trade-offs between price (lower or higher), technology (from simple/generic to complex/specialized and contractual safeguards (from looser to tighter). “All three (price, technology, and safeguards) are interactive, are determined simultaneously, and are scaled comparatively.”  (Williamson, 1996)

Safeguards are particularly important; they must be negotiated with credible commitment by both sides; e.g., agreements are designed to hold government to its promises or else contend with a consequence, one that is compatible with the cost of the hazard and comport with its investment. Safeguards are designed to relieve a specific contractual hazard—relief in accordance with the actions of an aggravating party who has committed during negotiations to mitigate the hazard against loss, but does not. In the contrary event, the aggrieved party is left with bearing the cost of the unrelieved hazard and is not compensated by appropriate adjustments in price and or technology.

Where trading relations are autonomous bilateral, PPP negotiations should involve prenegotiation meetings whereby both autonomous parties are invited to disclose their negotiating plans and strategies before the start of negotiations as a signal of willingness for bilateral trading. The so-called “hell or high water” brand of negotiating in the past creates more problems mostly unintended than it solves. Because contracts are incomplete and because negotiation capacities are typically asymmetric, there must be space for resolving unanticipated hazards in real time when they occur expost in a manner such that the parties are willing and competent to share the cost of fixing the problem. Such a condition describes a typical PPP infrastructure project of two autonomous parties in a bilateral relationship wherein decisions are made by mutual consent. True agreement rather than a zero sum agreement is the object of negotiations. The time and creativity invested in sharing negotiation plans and strategies pays dividends in building the confidence necessary for smooth implementation of a PPP project.

Organizational parameters in play include asset specificity, uncertainty levels and alignments. The analyst looks for critical information in the same or similar projects concerning causality. Plus or minus directional change analyses is pursued by comparative assessments of the agent’s behavioral assumptions of bounded rationality (i.e., limited cognitive capacity) and opportunism (i.e., self-interest with guile) for their net impacts on incentives and by observing if objective market parameters (uncertainty and/or small numbers exchange) are additive or subtractive to the net impacting process.

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