The Changing Nature of Contracting and Trust in Public‐Private Partnerships: The Case of Victorian PPP Prisons

This paper examines shifting constructions of contracting and trust that are manifest between pre‐2000 and post‐2000 public‐private partnerships (PPPs) providing prison facilities and/or services in the Australian State of Victoria. As such, this paper is significant because it outlines longitudinal insights into the nature of changing practices sustaining these PPPs. The post‐2000 period examined reflects a change of government and the policy context. Our examination is based on a range of primary and secondary documents. The primary documents comprise three pre‐2000 Prison Services Agreements and two post‐2000 Facilities Services Agreements. A number of government and other reports constitute the secondary documents consulted. While there are many substantive similarities between the contracts, we find five main areas of changed contracting practices over the period examined. These relate to: first, the objectives of the PPP prisons; second, risk management practices; third, the approach to performance measurement and reporting; fourth, the structuring of incentive and payment mechanisms; and fifth, the emphasis on collaboration. Overall, we find that the post‐2000 contracts promote a more overt development of goodwill trust and relational contracting, building on presumptions of contractual and competence forms of trust. However, quite different outcomes have been achieved from particular contractual contexts. Our study suggests that in complex PPP contracts, the influences of both the transacting parties and the transaction environment have been insufficiently recognized in the literature on PPPs.     

Management control in public sector Joint Ventures

Cooperation among public sector organizations (PSOs) is increasingly important in the management of resources in welfare systems. A Joint Venture (JV) is an organization form that enables PSOs to cooperate with each other in order to achieve economies of scale. However, JVs contain interrelated horizontal and vertical control relationships (between the owners and between the owners and the JV Company) that complicate their control. The first aim of this paper is to map the dynamics in vertical and horizontal control packages in municipal JVs and to describe the relational factors that affect them. Based on three case studies we conclude that vertical control packages are affected by: goodwill trust and competence trust; parent differences in management style and size in combination with control competence; parent diversification (low relatedness between the JV's activity and the parents’ other activities); and the horizontal control package (e.g., rules for parent interaction and distribution of work). Horizontal control packages are affected by: goodwill trust, system trust and calculative trust; parent differences in size; and efforts to achieve equality. The second aim of the paper is to contribute to the discussion on the relationship between trust and control. We observed that trust is potentially unaffected by the introduction of formal controls. We also found that trust has an inverted “crowding out” effect on control. A high ambition to maintain trust leads to underdeveloped formal controls. In addition, we found that the ambition to preserve trust may inhibit the realisation of economies of scale.     

Costly contracting in a long‐term relationship

We examine a model of contracting where parties interact repeatedly and can contract at any point in time, but writing formal contracts is costly. A contract can describe the external environment and the parties' behavior in a more or less detailed way, and the cost of writing a contract is proportional to the amount of detail. We consider both formal (externally enforced) and informal (self‐enforcing) contracts. The presence of writing costs has important implications both for the optimal structure of formal contracts, particularly the tradeoff between contingent and spot contracting, and for the interaction between formal and informal contracting. Our model sheds light on these implications and generates a rich set of predictions about the determinants of the optimal mode of contracting.     

Debt contracting and the goodwill debate

Extant literature offers mixed evidence on the quality of goodwill after the promulgation of SFAS 141/2 (Li and Sloan, 2017; Lee, 2011; Chen et al., 2008). We reconcile these conflicting findings by examining the role of managerial incentives in determining the efficacy of SFAS 141/2 in improving the quality of goodwill reporting. Using the context of debt contracting, we find that the value-relevance of goodwill is higher for firms that include goodwill in debt covenants in the post-SFAS 141/2 period. We also find that in the post-period, firms that include goodwill in their debt contracts appear to take timelier impairments. In addition, debt contracts in these firms also have tighter covenant thresholds, further corroborating the increased value-relevance of goodwill under the current impairment regime. We also document a relatively higher frequency of covenant violation for firms that use goodwill in their debt contract in the post-SFAS 141/2 period. Taken together, our results inform ongoing discussions regarding the accounting for goodwill and provide new insight into understanding of debt contracting and the role of accounting standards therein.     

Management control systems as inter-organizational trust builders in evolving relationships: Evidence from a longitudinal case study

Research on inter-organizational relationships argues that at mature stages, when trust has reached a high level, it will be damaged by new management control systems (MCSs). This longitudinal case study provides evidence to the contrary: in an open-ended and evolving relationship, even when trust is well established, MCSs can build it. High trust provides a platform where success encourages the partners to cooperate further, demanding, in turn, more MCSs and greater levels of trust to support cooperation. By providing evidence with a greater appearance of objectivity than informal controls can yield, action and result controls improve partners’ perception of each other’s trustworthiness, and build competence and goodwill-based trust. MCSs are used not only to supervise but also to coordinate, and this second, more salient function avoids possible suspicions that could damage trust.     

The impact of organizational contexts on EDI controls

The growing popularity of electronic data interchange (EDI) in business operations has led to a growing recognition of the need to implement proper control procedures. The requirements for control systems vary according to organizational context. A research model proposes that the organization, technological, and task characteristics as well as partner attributes affect formal, informal, and automated controls, each of which can be categorized as internal and external controls. Data were gathered from 110 companies that had adopted EDI. IS sophistication and task routineness were significantly associated with the use of formal and automated — both internal and external — controls. Decentralization and partner trust affected the use of internal and external informal controls. The results of this study could help EDI managers or auditors decide the necessary mode of controls for a certain organizational context. In addition, this study would be of interest to EDI practitioners in designing control systems.     

Beyond the contract: Managing risk in supply chain relations

As a consequence of the development of intensified relations with suppliers, for many firms the supply chain has become a significant source of risk exposure. In this paper we examine firms’ use of control practices to manage risks associated with intensified collaboration with supply chain partners. Specifically, we examine how buyers manage risks associated with interfirm transactions through their choice of supply partner, in terms of perceived goodwill and competence trust, and their use of multiple interrelated supply chain management (SCM) control practices. These control practices include contractual contingency planning, performance target setting, operational reviews, information sharing, supplier support and joint problem solving. We collect survey data from Japanese manufacturing firms about their relations with part suppliers to test hypotheses about the associations between transaction risks, selection of trusted suppliers and use of SCM practices. Our results support that transaction characteristics that are at the basis of transaction risks significantly affect the selection of trusted partners to collaborate with as well as their use of various control practices to manage relationships. We also find that in particular competence trust facilitates the use of control practices to support effective SCM.     

Does Social Capital Reduce Moral Hazard? A Network Model for Non‐Life Insurance Demand*

We study the effect of social capital in an environment in which formal, marketed insurance contracts coexist with informal agreements. We show that in the absence of peer monitoring and social pressure, non‐marketed contracts crowd out formal ones due to moral hazard. We prove, by means of an equilibrium concept typical of the network literature, that social capital can reduce moral hazard in informal agreements. We then show that under certain conditions, social capital increases the demand for marketed insurance contracts. The theoretical model we outline provides us clear guidance to measure social capital in a provincial‐level data set. The empirical model, which is estimated controlling for panel and spatial structure, supports our claim that social capital increases the demand for non‐life insurance.     

The contract,accounting and trust: A case study of an international joint venture (IJV) in the United Arab Emirates (UAE)

This paper reports on the results of a case study that examines the effect of the contract and accounting on inter-organisational trust in an international joint venture (IJV). The empirical setting of the research was an IJV relation between a United Arab Emirates (UAE) firm and its western partner. Data were gathered from multiple sources, including documents, observations, interviews and discussions with managers. The paper aims to explore the process of trust development and the role of the contract and accounting in this. We find that trust developed differently for the partners. Moreover the trust concerns of the partners were not the same. Based on this we conclude that trust was not automatically reciprocated. Instead it needs relating to other items such as the contract, accounting and also the institutional environment. The open-book accounting we observed could only be termed ‘partial’ because the western partner had access to the local partner's books but not the vice versa. But this partial open-book accounting created conflicts between the partners. We argue that developing one kind of trust through one particular medium may help one party but may damage the relationship between the partners.     

Risk Management in Public–Private Partnerships

This study investigates the risk management in long‐term concession contracts known as public–private partnerships (PPPs). The M4 is the first Australian PPP road concession to reach the end of its concession cycle. It provides a unique and timely opportunity to examine the risk management process over its contract term and the efficacy of PPP contractual structures in managing uncertainties. Our specific research interests focus on two questions. First, what risk management approach was implemented? Second, has the risk‐allocation strategy defined in the contract facilitated or hindered the risk management process? The findings of the study suggest that under the incomplete contract approach, the risk management practices rooted in a strong contractual framework, allied with good relationship skills, has contributed to a positive outcome for the M4 PPP. The study provides generalisable insights into risk management in inter‐organisational long‐term contracts.     

The impact of contract characteristics on the performance of public–private partnerships (PPPs)

Four significant features of public–private partnership (PPP) contracts are analysed to understand their impact on performance. These are whether the contract allows sanctions to be imposed; its complexity; its flexibility; and whether renegotiation is possible. The effects of these characteristics were investigated by surveying participants in all of the PPP projects in The Netherlands. The only feature considered to have any significant impact on perceived performance was the possibility of imposing sanctions. The authors’ findings cast doubt on earlier research into managing PPP performance and suggest that researchers, governments and the private sector need to look beyond contract terms to properly understand and manage PPP performance.     

Contemporary public–private partnership: Towards a global research agenda

This paper reviews the research agenda lineage on public–private partnerships (PPPs) from Broadbent and Laughlin's seminal piece in 1999. The PPP phenomenon is viewed at five levels: project delivery, organisational form, policy, governance tool and as a phenomenon within a broader historical and cultural context. We argue that whilst a variety of research issues will continue to be relevant, five corresponding areas deserve future visibility for a renewed research agenda: (1) Financialisation of PPPs, (2) global PPP market actors, (3) internationalisation of policy on PPPs, (4) long‐term complex contracts as a governing regime and (5) PPPs in BRICS and developing countries.     

Trust,regulation, and contracting institutions

This paper demonstrates that trust directly influences contracting efficiency. We document that trust reduces demand for contract regulation and positively relates to a high‐quality contracting environment, supporting a substitution hypothesis. Furthermore, contract regulation no longer leads to poor contracting outcomes. These findings suggest that lack of trust significantly explains inefficient contracting institutions. Based on interaction effects, we note that trust could complement formal enforcement in countries with weak regulation. As regulation increases, trust substitutes for contract regulation. Overall, trust positively promotes efficient contracting by reducing burdensome regulation and providing an alternative to formal contract enforcement.     

信任被定价了吗？ ——来自债券市场的证据

仅依赖法律等正式制度无法确保金融或经济的长期发展,信任等非正式制度在其中的作用不可或缺。鉴于此,本文研究信任这一非正式制度在债券市场中的价值。研究发现,信任不仅有助于提高债券信用评级,还有助于降低债券信用利差。同时,利用最高法“失信被执行人”数据还发现,失信及失信程度的增加会降低债券信用评级,提高债券信用利差。此外,本文还利用路径分析法发现,信任不仅会直接影响债券评级和定价,还会通过提升公司财务报告质量间接地发挥作用,即不仅投资者主观上更愿相信高信任度地区的企业,客观上这些企业也的确更为可信。进一步地,信任对债券评级和定价的积极作用在国有企业、金融业更发达地区的企业以及发债次数更多的企业中更为显著,即投资者与发行人之间的重复博弈机会越多,信任的价值也越大。本文研究结论提醒政府在推动企业融资成本下降时,应着重加强对信任这种地区乃至国家公共品的培育和建设。     

Determinants of contract terms for professional services

This study provides evidence on the determinants of contract terms between professional services firms and their clients. Because professional services are typically characterized by a high degree of transactional uncertainty and a double moral hazard risk, contracts can be essential for the creation of incentives to control the behavior of those involved in the service encounter. Based on both agency and organizational theory, hypotheses on the determinants of implementing a specific type of cost contract are developed and tested empirically with respect to management consulting firms. Our results indicate that (1) service characteristics exert a significant impact on the chosen contract type, (2) performance-based contracts may not be optimal, even if service output is measurable and verifiable, and (3) experience-based trust and reputation impact on the choice of controls used in short-term contracts. These results contribute to the field of management accounting by providing insights into the design of management control systems in service organizations.     

Financial Market Fragmentation and Reforms in Ghana, Malawi, Nigeria, and Tanzania

This article reports the findings from surveys of formal andinformal institutions and their clients in Ghana, Malawi, Nigeria,and Tanzania. It investigates the hypothesis that reformingfinancially repressive policies would not be sufficient to overcomefragmentation of financial markets because of structural andinstitutional barriers to interactions across different marketsegments. The four countries have substantially fragmented financialmarkets, with weak linkages between formal and informal segmentsand interest rate differentials that cannot be adequately explainedby differences in costs and risks. Nevertheless, the relativelylow transaction costs and loan losses of informal institutionsindicate that they provide a reasonably efficient solution toinformation, transaction cost, and enforcement problems thatexclude their clients from access to formal banking services.The findings imply that financial liberalization and bank restructuringin the African context should be accompanied by complementarymeasures to address institutional and structural problems, suchas contract enforcement and information availability, and toimprove the integration of informal and formal financial markets.     

Trust and Control in Network Relations: A Study of a Public Sector Setting

This study contributes to the literature by addressing the role of trust and control in public sector settings in which several organizations cooperate; its aim is to advance the understanding of trust and control in relations in which several parties are involved. The empirical study presented is a longitudinal case study of the relationships between organizational units within a municipality and a shared service center (SSC) that provides IT and administrative services. The main finding is that, compared to actors in previous studies of dyadic relationships in the private sector, actors in network relations seem to consider trust a risky option. It is less tempting to rely on a certain party when that party in turn is entangled with other parties. This situation causes a more intensive use of formal control. Another result is that increased trust between two parties might lead to more emphasis on formal control by a third party.     

Risk,partner selection and contractual control in interfirm relationships

This study examines firms’ use of partner selection and formal contracts as key approaches to manage transaction risk in interfirm relationships. We specifically examine the impact of transaction characteristics that generate transaction risk on (1) the importance placed on different selection criteria in the choice of collaboration partner, and (2) the complexity of contracts used to manage the collaboration. Survey data support that when confronted with greater risk from the transaction context, firms place more emphasis on trust-based and reputation-based selection criteria for partner choice and develop more complex (i.e., more inclusive and specific) contracts to manage the collaboration. Furthermore, our results show that partner selection mediates the effects of transaction characteristics on contract complexity, consistent with the argument that the information acquired during the partner selection process in response to risk facilitates the design of contracts to manage risk.     

Trust and use of covenants

This paper provides new evidence on how cultural norms affect contract design in international transactions. By using a comprehensive dataset on Yankee bonds, we find that bond contracts include more covenants when the issuer comes from a country with a lower level of trust. This substitution effect between trust and contractual detail holds after controlling for a variety of controls in country, firm and security level. The findings suggest that foreign firms can write sophisticated contracts that overcome the shortage of trust and facilitate the access to global capital markets.     

Modelling Risk Perceptions of Stakeholders in Public–Private Partnership Toll Road Contracts

This paper investigates the risk perceptions of key stakeholder groups typically involved in public–private partnership (PPP) toll roads. Risk perceptions have an important impact on these PPP schemes for investing in public infrastructure. However, the nature and extent of risk associated with the specification of a PPP contract that commits contracting parties to deliver on their obligations remain unclear. In the context of major transport infrastructure, such as a new toll road, the often‐cited key risk to investors is the traffic (and hence demand) risk. There are, however, other risks, including political risk and media risk, the latter often causing untold harm resulting in modifications to the planned infrastructure. This paper develops a method to capture evidence on how public sector and private sector partners involved in previous PPPs perceive the levels of risk associated with each risk attribute, as a way of identifying the ex ante risk setting brought to negotiations in PPP toll road investments. Using a sample of 101 experts with contract experience in 32 countries, we develop a stated choice experiment and estimate a discrete choice model to quantify a risk profile index (RPI) to capture the perceived (relative) influence of each dimension of risk, and then identify sources of systematic differences in the RPI as a way of understanding the influence of personal traits and contextual and contractual factors.