5. Legal issues
125 pdg Partnership for Democratic Governance
Box 5.5. Types of risk after a contract has been agreed
• Payment risk: the risk associated with government’s ability and commitment to pay • Demand risk: the risk associated with consumers’ ability and willingness to pay for services • Performance risk: the risk of properly delivering services or operating an asset and meeting performance standards
• Regulatory risk: the risk of changes or failure to change regulations (e.g. refusal or inability to pdg change fees or tariffs when costs increase) Partnership for Democratic Governance
• Foreign exchange risk: the risk of local currency depreciation and devaluation
• Security risk: the risk of harm to project staff or assets due to security problems
• Political risk: the risk of a change in government that could alter the project
are being made by third parties (citizens, businesses, etc.) the contract must state how fees will be collected and revenues allocated. Finally, the government may wish to condition payment on the availability of funding; if the funding mechanism is sufficiently transparent (for example, publicised on the Internet), the government may, in effect, be able to shift to the contractor at least some obligation to monitor the availability of funds, i.e. the contractor may be at risk if it fails to confirm that funds are available. Duration The contract must outline the timeframe over which the work will be provided. That contract duration, or “term,” will often coincide with the availability of funds. For example, a base year contract may span one fiscal year, with further options available in succeeding project years. The contract term may be based on fixed dates or a timeline, and may include a base period and optional extension periods; the options may be unilaterally exercised by the government or be triggered by mutual agreement. The ability to extend can be important to avoid service delivery gaps as a result of delays in finalising a
subsequent tender. In fragile states it may often be advisable to develop shorter contracts since many factors will change quickly, including the level of risk (which affects pricing among other things) and the ability of the government to resume or begin providing the services. However, short-term contracts have higher relative costs because start-up costs (including project design, implementation of monitoring and implementation systems) will need to be incurred again when contracts are resumed or extended. Moreover, the price offered by bidders may rise as they seek to “front-load” their pricing to take account of the risk that a contract might not be extended. In addition, longer-term contracts can allow a contractor time to establish relationships and allow for continuity in practice. On the other hand, long-term contacts (e.g. over five years) lose the positive impacts of competition. >TIP: In fragile states it may often be advisable to develop shorter contracts since many factors will change quickly, including the level of risk (which affects pricing among other things) and the ability of the government to resume or begin providing the services directly itself.
OECD PDG HANDBOOK ON CONTRACTING OUT GOVERNMENT FUNCTIONS AND SERVICES IN POST-CONFLICT AND FRAGILE SITUATIONS © OECD 2010