Contract Renegotiation Research Articles

Contract Enforcement and Productive Efficiency: Evidence from the Bidding and Renegotiation of Power Contracts in India

Weak contract enforcement may reduce the efficiency of investment in developing countries. I study how contract enforcement affects efficiency in procurement auctions for the largest power projects in India. I gather data on bidding and ex post contract renegotiation and find that the renegotiation of contracts in response to cost shocks is widespread, despite that bidders are allowed to index their bids to future costs like the price of coal. Connected firms choose to index less of the value of their bids to coal prices and, through this strategy, expose themselves to cost shocks to induce renegotiation. I use a structural model of bidding in a scoring auction to characterize equilibrium bidding when bidders are heterogeneous both in cost and in the payments they expect after renegotiation. The model estimates show that bidders offer power below cost due to the expected value of later renegotiation. The model is used to simulate bidding and efficiency with strict contract enforcement. Contract enforcement is found to be pro-competitive. With no renegotiation, equilibrium bids would rise to cover cost, but markups relative to total contract value fall sharply. Production costs decline, due to projects being allocated to lower-cost bidders over those who expect larger payments in renegotiation.

Under/Over-Investment and Early Renegotiation in Public-Private Partnerships

We consider a public-private partnership in an infrastructure project, which requires specialised expertise during the construction stage for the infrastructure to operationalise. This entails that, after an investment is made to begin building the infrastructure, its construction is completed at a cost, which increases with the investment at an increasing rate, and is higher if the government replaces the firm beforehand. The likelihood of a lower operating cost increases as well with the initial investment. Once the infrastructure is in place, the firm manages it, taking advantage of the (usual) synergy between construction and operation. Given the characteristics of the project, the firm has an incentive to either under-invest or over-invest in early construction, seeking a renegotiation thereafter. We show that, in a renegotiation-proof contract, the marginal cost of the investment facing the government is either above or below the marginal “technological” cost of the investment, at optimum. Accordingly, the resulting investment - although enhanced - is either below or above the efficient level. The contractual payoff of the firm is above its renegotiation payoff in the former case, below in the latter. We further show that when the firm holds private information on the operating conditions, the government may welcome a contractual renegotiation either as a way of containing (avoiding) the distortions due to the informational gap, or as a tool to pass the cost of construction completion onto the firm, or both.

In Translation: Paulin Soumanou Vieyra

In Translation:Paulin Soumanou Vieyra Mélissa Gélinas "First Comes the Ear": Paulin Soumanou Vieyra and the Politics of African Languages Those years of growing awareness were also years of ember … Africa was looking ahead. … Witness to such key moments, Paulin Soumanou Vieyra filmed everything … day and night. —Ousmane Sembène, "Moment d'une vie: Paulin Soumanou Vieyra" Seldom is the historian also a witness to and even, to a certain extent, an artisan of that whose history it tells. Such is Paulin Soumanou Vieyra, a man invested in African cinema on so many levels. —Présence africaine, "Le cinéma africain: Des origines à 1973" Films have been made and seen in Africa since cinema's inception, but the 1950s mark the time when Africans themselves gained access to the equipment and training necessary to start making their own films. In a decade rife with decolonizing ruptures, Paulin Soumanou Vieyra (1925–1987) would spearhead the establishment of African cinema as a filmmaker, theorist, and historian. I have selected the texts translated here, "Film and the Problem of Languages in Africa" (1975) and "Remarks on African Cinema" (1978), because they highlight an important thread in the evolution of Vieyra's multilayered engagement with African cinema: his unwavering commitment to recognize the cultural and political significance of African national languages for establishing an African cinema. These translations reveal the extent to which Vieyra's views on language in the African postcolonial context shaped his ideas about cinematic ontology, the technological and institutional implications of audiovisual translation (especially dubbing) in the management of cinematic multilingualism, and the cinema's role in disrupting colonial legacies. At the same time, the selected pieces showcase some of the many roles that Vieyra played throughout his life in the emergence of postcolonial African cinema. [End Page 118] Published as part of Vieyra's pioneering summative history of African cinema (Le cinéma africain: Des origines à 1973), the chapter "Film and the Problem of Languages in Africa" (1975) starts with an outline of the reasons African languages are marginalized as legitimate vehicles of knowledge and culture. This necessary preamble then serves to propel Vieyra's argument in favor of a cultural policy that would ensure that cinema in Africa uses African languages as key vectors of knowledge about Africa and as the support on which its visual cultures are deployed. Ultimately, Vieyra argues in favor of dubbing as a way to make African cinema more accessible to Africans and to help establish more equal cultural exchanges between the newly decolonized African nations and between these nations and the rest of the world. The second translated text, "Remarks on African Cinema" (1978), is an interview that took place between Vieyra and African cinema scholar Pierre Haffner (1943–2000) while both attended the Seventh Carthage Film Festival in Tunis. This interview demonstrates how the ideas developed in the previous piece come to bear on Vieyra's conception of cinematic ontology. The interview also situates Vieyra's work in the late 1970s as a filmmaker, as Ousmane Sembène's production manager, and as a critic and historian.1 To film and media scholars, the most interesting part of this piece will likely be the "first comes the ear" theory that Vieyra briefly outlines. According to Vieyra, the cinematic medium is first and foremost grounded in language and sound, so that when audiences experience a "mixed visual" such as sound cinema, that experience is informed first and foremost by what meets the ear, more so than the eye. Vieyra's conceptualization of the cinematic medium is thus deeply informed by his understanding of orality as central to African cultures, a phenomenon whose relationship to African cinema he contextualized in "Film and the Problem of Languages in Africa." By diverging from the primacy of the visual, Vieyra's 1970s writings can be seen to turn film theory on its head in ways generally attributed to Western figures such as Michel Chion. And while Vieyra's "first comes the ear" theory is but one of several elements that can be derived from his writings and thinking on film, its renegotiation of the audiovisual contract stands out because it constitutes an unrecognized contribution...

Contractual incompleteness and renegotiations of public private partnerships: A mixed-methods analysis

Public-private partnerships (PPPs) are frequently renegotiated. The reason is that these long-term contracts (of over 30 years) require major investments and therefore are necessarily incomplete. Thus, research perceives the renegotiation of PPPs as their biggest pitfall. The abnormal occurrence of renegotiations leads to low efficiency and potential problems in this type of organizational choice. This study addresses the contractual incompleteness and the effect of renegotiations by using Portuguese PPPs. The use of mixed methods (a qualitative approach using fsQCA and a quantitative one) provides a deeper knowledge of the conditions that can cause renegotiations. The results show that investment, debt, type of shareholder, and type of payment have a strong effect on the occurrence or absence of renegotiations. Regulatory agencies responsible for both the creation and the renegotiation of PPPs must consider these findings in the design of PPP contracts, particularly regarding the payment conditions of each project, as this is a critical condition for posterior renegotiation of contracts. Classification- JEL:

Dynamics of ex post uncertainty and negative behavioural direction in alliances

Adopting ex post dynamism, we introduce a novel approach to the negative behaviour in strategic alliance where firms' evaluation of accumulated risk during alliance operation leads to risk-aversive behaviour. To examine this process, a total of 395 employees from China and Korea completed a survey on risk-aversive behaviour in strategic alliance. Based on the collected data, the study measures firm's re-evaluation of alliance and their antecedents and outcomes. Key results show that among the ex post uncertainties, task uncertainty had the largest influence on risk-aversive behaviour. Moreover, the study finds that when EA firms perceive high level of uncertainty during an alliance operation, they show intentions to undertake contractual renegotiation whereas non-EA firms were likely to protect their core assets. Based on the findings, theoretical and practical implications on the management of risk-aversive behaviour in strategic alliance are discussed.

An empirical examination of moral hazards and adverse selection on PPP projects

Purpose Failures of public–private partnership (PPP) projects are often ascribed to the agency problem, which arise under conditions of inadequate and asymmetric information when a principal (the client) hires an agent (the contractor). This paper aims to identify the causes and effects of moral hazard and adverse selection on PPP construction projects using a synthesis of extant literature (to determine key variables) and analysis of survey questionnaire data collected. Design/methodology/approach Mean score ranking was used to rank the causes and effects of moral hazard and adverse selection problems in PPP construction projects. One sample t-test was conducted to establish the relative significance of these variables. Findings Effort dimensions (which are not verifiable), low transfer of risk, lack of accurate information about project conditions, wrong party chosen to execute project and renegotiation of contracts were the most significant causes of moral hazard and adverse selection problems in PPP construction projects. In addition, reduction of competition, high transaction costs, consequences on profitability of project, siphoning of funds and negative implications on enforceability of contract were the most significant effects of moral hazard and adverse selection problems in PPP construction projects. Practical implications Application of these findings will help mitigating moral hazard and adverse selection problems occurring when undertaking PPP construction projects. Originality/value Research findings provide guidance to construction stakeholders in the PPP sector on the different causes and effects of adverse selection and moral hazard. This pioneering study is the first to conduct an empirical assessment of the causes and effects of moral hazard and adverse selection of PPP construction projects in a developing country.

Americanising Brexit Britain's Welfare State?

AbstractWill the British welfare state revert to an Americanisation trajectory or retain features of the European model after April 2019? After a period of historically prolonged austerity and substantial working age welfare reform, with the UK facing yet another renegotiation of the social contract in a post‐Brexit world, the question of whether there remains space for an alternative to the ‘American’ model is of crucial importance. We argue that there has been a blurring of differences across the American and European welfare states in terms of working age benefits, as most countries have adopted aspects of work‐based conditionality reforms, which attach the receipt of benefits to the active pursuit of work and, to varying extents, the underlying politics of US welfare reform, where there are large coalitions supportive of more punitive policies towards low‐income adults and minorities. These trends are taking place against the backdrop of a second major shift: increasing restrictions on benefits for immigrants. This double narrowing of the welfare state, making benefits conditional for citizens and excluding those who are not citizens, seemingly sets the agenda for a more restrictive post‐Brexit welfare state. The experience of the last two decades suggests, however, that the adoption of the American model has not been wholesale; steering a middle path between punitive conditional American benefits and more traditionally generous universal benefits is on the agenda across advanced welfare states.

STRATEGIC BIDDING AND CONTRACT RENEGOTIATION

AbstractWhen firms bid in procurement auctions, they take into account the likelihood of future contract renegotiations. If they anticipate that certain input quantities will change ex post, they have an incentive to strategically skew their itemized bids, thereby increasing profits for themselves and costs for the procuring agency. We develop and estimate a structural model of strategic bidding using a data set of road construction projects in Vermont. We find that bidding strategies lead to increased markups for renegotiated items and reduced markups for nonrenegotiated items, results consistent with bid‐skewing.

Renegotiation of joint venture contracts: The influence of boards of directors and prior ties as alternative governance mechanisms

Research on alliance governance has pointed out that joint ventures (JVs) are particularly complex forms of collaboration. Partnering firms therefore often face difficulties in anticipating contingencies and collaborative behaviors at the contract negotiation stage. When initial JV contracts are incomplete, renegotiation represents a key strategic opportunity for enhancing contractual safeguards or coordination guidelines over the course of the joint venture. Costs and risks entailed by renegotiating JV arrangements at a later stage are far from trivial, however. Existing research on alliances suggests that practitioners have alternative relational and formal governance solutions at their disposal for handling possible inefficiencies caused by contractual gaps over time. Although insightful, this research does not enable a determination as to whether these alternative relational and formal mechanisms substitute for or facilitate ex post contractual renegotiation. The competing arguments found in the literature provide little guidance to JV practitioners as well. Our results show that the collaborative context within which the JV is embedded (i.e., prior inter-partner ties) obviates the need for enhancing incomplete JV contracts ex post. By contrast, ex post contractual adjustments are fostered and facilitated by the formal and administrative apparatus engaged over the course of the JV (i.e., an involved JV board of directors). Such opposing effects suggest that prior ties can “prevent” the occurrence of inefficiencies caused by contractual gaps, while an involved JV board primarily can act as a mediation and renegotiation platform to “repair” the exchange when inefficiencies occur. Our findings highlight the multidimensional nature of joint venture governance, and in particular the interplay among various formal and informal governance solutions in the execution of joint ventures. By unpacking their complex effects on the decision to renegotiate incomplete JV contracts, our study also holds important value for managers seeking to govern their JVs over time.

Highway Infrastructure: Issues Concerning Private-Sector Participation

This paper examines the economic issues and evidence surrounding the role of the private sector in providing highway infrastructure. The focus is on public-private partnerships (PPPs) or long-term concession agreements between governments and private firms. PPP proponents have called for shifting infra- structure construction to the private sector to take advantage of more efficient provision of projects and the transfer of project risk from taxpayers to investors. Evidence from the United States and abroad does not consistently support this contention, although limitations in the research paradigms make a significant portion of the evidence of limited value. It is likely that idiosyncratic issues related to a particular project and the type of government involvement or over- sight come into play. Another issue associated with expanding the use of PPPs for public investment is the design of concession contracts. Some contracts are renegotiated, distorting incentives for bidding up front and for efficient production once the project moves forward. To get the incentives right, PPPs should involve competitive bidding, no contract renegotiation, and the potential for bankruptcy for participating private firms who overestimate the revenues that can be generated or underestimate the costs in their initial bids.

Decision support for fleet allocation and contract renegotiation in contracted open-pit mine blasting operations

In the current copper mining scenario, where prices are decreasing and pits are larger, there is a pressing need for increasing operational productivity. This is particularly important for mining contractors, who are constantly facing the additional pressure of obsolescence if they are not able to provide cost-savings for mine owners. In this paper, we deal with operational efficiency for blasting operations in open-pit mine sites, and propose a framework for minimizing truck allocation costs with hazardous materials based on mathematical programming. Apart from reducing operational costs, the proposed research allows contractors to re-negotiate contracts with mine owners. An integrated model for blasting operation is proposed, taking into account multiple owners with various open pits, each one of them having multiple blasting grids. The main methodological contribution is the inclusion of specially tailored constraints for modelling the blending requirements for the on-delivery production of the explosives, an important aspect given the hazardous nature of the chemical compounds that are transported. The proposed framework was implemented by a Chilean contractor, leading to savings up to 15% of the total operational costs and allowing better tactical decisions, as contract renegotiation or fleet design.

A DECISION SUPPORT SYSTEM FOR THE RENEGOTIATION OF PPP CONTRACTS

Public Private Partnership (PPP) contracts tend to have longer contract durations compared to other conventional procurement methods. A contract renegotiation becomes inevitable in most of the cases. The renegotiation process usually develops a number of scenarios in order to regain the contract equilibrium. The common renegotiation scenarios used are: increasing the service charges, increasing the concession period, or paying a lump sum amount to the party of concern in order to maintain a fixed rate of return and keep the return on equity constant. In this paper, a method of selecting the optimum scenario among the different scenarios is proposed. The aim of this research is to facilitate the renegotiation process by offering an automated system to select the optimum renegotiation scenario that preserves the rights and the interests of the project stakeholders. This is done using a weighted sum model to calculate the weights and ranks of a number of factors influencing the stakeholders’ decisions. A Decision Support System (DSS) is developed with the aid of Microsoft Excel 2013, Visual Basic for Applications (VBA) programming language, and the Precision Tree 5.5 for Excel add-in.

The capitalization of operating leases: Analysis of the impact on the IBEX 35 companies

Purpose: This paper analyzes the consequences of the change in the accounting rules about operating leases in the companies and users of financial information. Design/methodology/approach: We use the constructive capitalization method to estimate the liabilities and leased assets and perform an ex ante analysis of the regulatory impact in the IBEX 35 non-financial companies. Non-parametric tests are employed to examine the effect on certain ratios, and through a multivariate regression we investigate the business characteristics that explain the variation of EBITDA. Findings: The ratios under study are significantly affected by the capitalization of operating leases. The explanatory analysis shows that larger companies, which have a higher market valuation and belong to the retail sectors are the ones with a greater increase in EBITDA. Research limitations/implications: The sample size is small, which implies some caution in the generalization of the results. Certain hypotheses have been introduced to apply the constructive method, although the sensitivity tests confirm that the results are robust. Practical implications: In certain cases, to avoid non-compliance with restrictions, particularly in debt contracts, contract renegotiations should be initiated. The constructive method yields liabilities and assets significantly smaller than other simpler methods (such as the factor method), so these results can be a relief for certain non-sophisticated users. Social implications: Investors, shareholders and lenders, and other users will have more transparent information, which should improve their decision-making. Originality/value: The study of the impact on the magnitudes of the balance sheet and the financial ratios is complemented with a descriptive analysis, which takes into account the industry, and with the modeling of the explanatory factors of the change in EBITDA.

Low Carbon Scenarios for Europe: An Evaluation of Upscaling Low Carbon Experiments

This paper focuses on transformational processes in a post Paris agreement context. It uses IMACLIM-R, an E3 (Environment–Energy–Economy) model allowing for the integration of urban forms, transport dynamics, environmental policies and behaviors. Building upon the study of a set of local low carbon experiments throughout the European Union (EU), the paper explores two contrasted stylized scenarios of the low carbon transition in Europe. It highlights that carbon pricing policies are useful guides for transition but cannot achieve the ambitious objective without significant transition costs. It shows that low carbon experiments in the transport and energy sectors are critical dimensions of complementary measures in favor of green infrastructures. Broadening and upscaling low carbon experiments helps overcome the inertias of the transport sector by fostering radical changes in infrastructures, thereby introducing deep transformations in mobility behavior. This can then generate positive macroeconomic outcomes, even though they are also dependent on specific financial support, calling for a renegotiation of the social contract based on specific fiscal reforms and measures to secure funding for these initiatives. The paper concludes with some research avenues for improving this preliminary work and calls for a better understanding of the complexity of the socio-economic patterns of both the transition and the conditions for an effective implementation.

Housing careers, intergenerational support and family relations

The home and family have always been mutually embedded, with the former central to the realization and reproduction of the latter. More recently, this mutuality has taken on a more critical salience as realignments in housing markets, employment and welfare states in many countries have worked together to undermine housing access for new households. In this context, families have become increasingly involved in smoothening the routes of young adults members up the ‘housing ladder’ into home ownership. Intergenerational support appears to have become much more widespread and not just confined to familialistic welfare regimes. The role of intergenerational support for housing remains, however, highly differentiated across countries, cities and regions, as well as uneven between social and income classes. This introduction to the Special Issue explores how the role of housing wealth transfers has impacted the renegotiation of the generational contract. In doing so, it sets the scene for the articles that follow, each of which contribute significantly to advancing understanding of housing as a key driver of contemporary social relations and inequalities.

Contract stability in European road infrastructure PPPs: how does governmental PPP support contribute to preventing contract renegotiation?

ABSTRACTIn the last decade a considerable number of PPP contracts in Europe turned out to be instable and were renegotiated. This paper studies which combinations of conditions in terms of macro-level business environment and governmental PPP support and at project-level (remuneration scheme, risk allocation, project age and contract duration) contribute to avoid contract renegotiation, by conducting a qualitative comparative analysis of twenty five European road infrastructure projects. Results show that although the broader macro-level business environment has a clear contribution, contract stability can benefit from an availability-based remuneration scheme and a well-developed governmental PPP support in combination with other conditions.

Do covenant violations affect audit report timeliness?

We investigate the impact of covenant violations on audit report timeliness. We argue that the existence of covenant violations might motivate clients or banks to seek waivers or renegotiations of current lending contracts. Otherwise, auditors might perform more audit tests before issuing audit opinions. Ultimately, auditors will increase the number of days to complete the audit. Our major findings are consistent with our prediction. In addition, we find that the presence of early covenant violations further increases audit delays. Our findings identify another factor affecting the audit report timeliness and one economic consequence of covenant violations.

Dynamics of ex post uncertainty and negative behavioral direction in alliances

Adopting ex post dynamism, we introduce a novel approach to the negative behaviour in strategic alliance where firms' evaluation of accumulated risk during alliance operation leads to risk-aversive behaviour. To examine this process, a total of 395 employees from China and Korea completed a survey on risk-aversive behaviour in strategic alliance. Based on the collected data, the study measures firm's re-evaluation of alliance and their antecedents and outcomes. Key results show that among the ex post uncertainties, task uncertainty had the largest influence on risk-aversive behaviour. Moreover, the study finds that when EA firms perceive high level of uncertainty during an alliance operation, they show intentions to undertake contractual renegotiation whereas non-EA firms were likely to protect their core assets. Based on the findings, theoretical and practical implications on the management of risk-aversive behaviour in strategic alliance are discussed.

Restoring trust in the context of strategic change

The strategic change literature underscores the risk of loss of trust during change but does not address how trust can be restored once compromised. We conduct an inductive longitudinal study of an organization undergoing post-merger integration and examine how management worked to restore employee trust after a conflictual change process. We introduce the psychological contract perspective, which emphasizes relational explanations for loss of trust. We show that repairing trust can be conceptualized as a renegotiation of the psychological contract and develop a three-stage model of trust repair. In contrast to extant models of trust restoration, which emphasize diagnosis, explanation, penance, and reform, our model attends to relational dynamics that may emerge in the context of organizational change, with heightened uncertainty and ambiguity, and highlights the importance of restoring balance and renegotiating the contractual basis of the relationship.

An enactment theory model of supplier financial disruption risk mitigation

PurposeThe purpose of this study is to examine supplier financial risk through the lens of Enactment Theory, to explore the role of transparency and communication on buyers’ perceptions of supplier default risk. The authors develop a theoretical model proposing that buyer communication with suppliers leads to preemptive actions that may prevent supplier financial default and fewer supply disruptions. The results suggest that reducing equivocality in buyers through communication with suppliers leads to understanding of financial factors not captured through third-party financial indicators, leading to proactive risk mitigation activities that prevent disruptions during recessionary economic cycles. This research proposes that transparency and communication reduces equivocality in buyers, spurring them to take contractual actions that reduces, financial default in key suppliers, which leads to fewer supply disruptions.Design/methodology/approachSurvey data collected from 175 firms in the North America and Brazil during a period of the global recession is used to test the impact of communication with suppliers on supply chain disruptions in periods of economic crisis. This relationship is mediated by proactive contract renegotiation and supplier financial health, supporting a model grounded in Enactment Theory.FindingsResults show that buyers who regularly assess and develop an understanding of their key suppliers’ financial conditions are more likely to re-negotiate contracts that revise payment terms, leading to improved supplier working capital and fewer supply chain disruptions.Research limitations/implicationsValidation of industry-specific financial ratios and figures could provide a richer set of insights and some quantitative measures for establishing baseline on what levels of financial ratios actually result in disruptions. However, future research should consider using a cross-sectional sample and, in addition, a qualitative approach to capture risk from a greater variety of industries and supply chain dynamics.Originality/valueThe notion of effective communication flows as a means for reduction of supplier disruption risk is aligned with Enactment Theory views that emphasize the benefits of risk reduction. Equivocality is reduced in buyers through information exchange and formal assessments in complex environments. This research suggests that while such communication does not have a direct effect on supply disruption risk, it is mediated through proactive buyer actions to improve supplier financial health and contract re-negotiation mechanisms that may preempt financial distress. These are important lessons learned that provide guidelines for supply chain executives in future economic recessions that may occur in the coming years.