Introduction
The public sector uses contracts, which may be internal or external, with corporate and nonprofit organizations, to deliver many of its services. People must understand how to create service contracts and specifications and ensure services are provided under those contract conditions. In Elbasan, Albania, there are different ways in which contracts are developed and affect the distribution of services.
First, there are several types of contracts in various sections of the public sector; these variations include the contract length, whether or not they are chosen via a competitive bidding procedure, the level of information in the specifications, and the severity of the default provisions. However, there are different reasons as to why they occur. Some reasons include the market’s structure, managers’ perceptions of the kind of contracts most likely to produce quality and efficiency, and the political perspectives of those determining the contracting policy.
Different Forms in Different Sectors
Contracts between buyers and suppliers in the Municipality of Elbasan were originally for a year, although both parties had long-term connections. Despite the brief duration of the contracts, the early days of contracting did not see the widespread usage of destructive default procedures and penalty clauses. However, since the purchasers needed more confidence in the providers, there was much to resort to for information on the processes carried out as per the contract. Large portions of work did not typically have competitions. Most services were subject to tendering, although in most cases, suppliers were not required to compete with other providers for most of the work. The specifications and contracts’ specifics hint that this has not always been the case, but the lack of bids would seem to imply the need to build trust (Turhani & Turhani, 2013). Although the reason for this is unclear, it might have resulted from people being placed in unfavorable circumstances. There are some questions about whether what the public authorities referred to as contracts represented a contractual relationship in the truest sense. Internal agreements are not legally binding since there is only one legal unit, as has long been acknowledged.
Different protocols were used by local governments in various Municipalities sectors. Outsourcing computer contracts was preceded by negotiations instead of a tight, sealed bid process, indicating the growth of a close relationship between the computer vendors and the departments. Major contracts involving the TEC (an IT services company), tax departments, and social assistance department in Elbasan Municipality began as a very thorough and punishing contract. However, they developed into more trusting provisions as the year proceeded.
Effects on the Type of Contracts
Laws and Regulations
The legal system in Albania contains legislation, such as the 2008 “Tendering Law,” that directs public bodies to foster competition and, as a result, prevent the emergence of enduring and less competitive relationships. Some individuals in the public sector think contracting is a legal and professional affair. Lawyers who design contracts hold this opinion in particular and believe they ought to be involved in establishing the connections between parties. They use the same guidelines when hiring cleaning services, construction engineering firms, and a nearby charity branch. While local governments’ buying department needs to be safeguarded, the law is not the only solution.
Efficiency and Quality
Recent research on contracting has revealed that in addition to these fundamental market drivers, additional factors may affect how businesses trade with one another. It was discovered, for instance, that even when there are many possible suppliers, buyers may prefer to establish a long-term connection with a minor number. They take this activity to achieve higher quality and more cost-effective long-term deals.
Politics
Local governments and businesses that provide public services have a decently close relationship. For instance, the procedure for creating competitive tendering in local government was developed by advisors hired from businesses who wished to compete for the local authority’s job. Working groups were established in addition to advisers to give businesses a voice in how the procedure should be run. On the other end, some members of local authorities, particularly those from left-leaning political parties, opposed outsourcing to the private sector tasks previously carried out by directly engaged labor.
There were right-party authorities whose members objected to the Department of the Environment telling them how to conduct their operations and left-party authorities that the left party dominated. In an Elbasan Municipality, contractors complained that certain municipalities consciously structured the contracting procedure to stifle competition. Even among those awarded contracts by the Elbasan local council, 25% were fairly dissatisfied, and 11% were extremely so (Turhani & Turhani, 2013). The councils’ opposition to using independent contractors, the difficulty of the procedures, and the complexity of the paperwork were the causes of this displeasure. Similarly, the central government has frequently given contractors work without inviting current staff to submit proposals.
New Institution Economics
The question of explaining market behavior when these criteria do not apply arose as economists realized that the real world unveiled a few characteristics of the theoretic world with perfectly rational choices and perfect knowledge in an impeccably viable market. The issue is significant in government contracts because it is uncommon for perfect competition to exist in government procurement. However, in relatively low-level purchases, like vehicles or stationary, there may be a highly viable market with a wide range of competing suppliers, making it possible for governments to gather enough data and be in a position to make well-informed, optimal decisions.
The contract between a contractor and a local government is the theme to the same burdens as any other contract. Each party seeks the best result and will use whatsoever means necessary. Both parties will make an effort to reduce the risk that comes with joining the contract for themselves. The agreement will reflect the parties’ relative knowledge, influence levels, and interpersonal dynamics.
Human Factors Environmental Factors
Due to imperfect knowledge and limited processing power, participants in most markets are typically unable to make fully optimal judgments. Even if they had the knowledge and ability, it would still be difficult to guarantee that the person from whom one party is buying will fulfill their obligations and be inspired and able to do so in all potential scenarios that may emerge afterward.
Solutions to Bounded Rationality
A “complete contract” addresses every scenario or contingency and is designed so all parties know the exact repercussions of every conceivable scenario. Such contracts are uncommon and can only be written for relatively straightforward transactions. Under the assumptions of bounded rationality, complicated transactions result in a cost of writing entire contracts that is too high.
The prospect of “opportunistic behavior,” in which one side in the transaction seeks to take advantage of the other, arises from bounded rationality. One approach for one side to have an advantage over the other is to have more knowledge or keep private information a secret.
As a result of incomplete knowledge, which is referred to as “information asymmetry,” self-interested bad behavior such as “adverse selection” and “moral hazard” are both made feasible (Turhani & Turhani, 2013). For municipal governments, the issue is how to organize the procurement process when full contracts are impractical. Since the features of a service are theoretically more challenging to design than those of a product, it is particularly challenging in the case of services. Specifying every potential contingency in advance for many public services is impossible.
Adversarial and Obligational Contracting
‘Obligational’ contracts are also known as ‘Relational’ contracts since the two parties are obligated to work together for the success of their combined efforts outside the scope of their instantaneous contractual connection. Contracts referred to as “obligatory” are distinguished from those referred to as “adversarial” when each party is just interested in the immediate contract and has no care for the joint venture’s success.
Sako has used these two archetypal associations to provide a framework for comprehending contracting conduct. The Obligational Contractual Relationship (OCR) is characterized by mutual trust, cooperation for mutual gain, risk sharing, and other behaviors that go beyond the terms of the contract. At the other extreme, an adversarial contractual relationship (ACR) exists if there is little trust, the assumption being that both parties want to benefit at the expense of the other, and contracts are employed to insulate one party from the other (Turhani & Turhani, 2013). According to Sako, the contracting process consists of eleven components: risk-sharing, communication channels and intensity, technology transfer and training, goodwill trust, competence trust, contractual trust, approach to “contractualism” or contingencies, documentation, length of trading, ordering procedure, and transactional dependence.
Transactional Dependence
Under OCR, the buyer might want to build closer ties with fewer suppliers to reduce the dependence brought on by fewer closer ties. There are many different types of dependency experiences. Local governments that have entered into contracts for services like garbage collection (like the Commune of Bradashesh and the Municipality of Elbasan) have occasionally come to rely entirely on a single company that was awarded the contract for that local government territory.
Ordering Procedures
The ordering process establishes the tone for how the two parties will interact. Suppose contracts are based on an extract against a description that is the same for all bids. In that case, contract development is the responsibility of the purchasers rather than a cooperative effort between purchasers and suppliers. In order to guarantee specification compliance after the contract has been let, a method called contract management is used.
Length of Trading
The kind of business or charity the local government does business with can vary depending on the length of the relationship. Small local suppliers are less likely to be able to handle a succession of short-term agreements with any buyer than large suppliers with various contracts in the public and private sectors. This is particularly true for Community care, in which few regional nonprofit groups depend solely on funding from their regional government. In other words, they depend on a single transaction, as the organization would cease to exist without it. In reality, they frequently go from one brief-term contract to the next.
Document for Exchange
Contracts and the corresponding specifications have typically been lengthy and comprehensive in the Elbasan Municipality. The contract and requirements, in some circumstances, were based on operating manuals that were in place when the service was controlled directly. For instance, the previous department area office program guides were the original contracts between the assistant social department, the tax department, and TEC (IT service firm). People now understand that it is impossible to include everything in a contract and that service delivery is not always guaranteed, even when it does have lengthy and detailed specifications. As consumers discovered other ways to guarantee quality, such as participating in the suppliers’ quality assurance processes or speaking with the users of the services, contracts have become less specific.
Contractualism
Most contracts have contingency clauses, such as how bad weather might affect agreements for highway maintenance. It is up for debate whether each potential situation can be appropriately specified in advance and whether its likelihood can be clarified. The OCR option relies on trust and the hope that an agreement may be reached by agreeing on procedures in which both parties can agree on contingencies and what should be done. The ACR option presupposes that an agreement won’t be reached or would be challenging and that every possible scenario needs to be planned for in advance.
The public sector uses a variety of strategies to answer this question. Contingency planning attempts have not always been successful. There must be mechanisms whereby the purchasers of services and the supplier agree on the scope of an individual’s challenges. Local authorities typically use a “banding” system in which progressive infirmities result in progressively intensive service.
Trust: Goodwill Competence and Contractual
According to the ACR method of contractual trust, the supplier never acts without an explicit, written order. Oral communication can affect supply or modify specs in an OCR partnership. The degree to which each party is willing to rely on the other is called goodwill trust. There is no underlying cause for building confidence, and antagonistic interactions are probably unavoidable if the chosen contractors think that, notwithstanding the buyer’s objections, they were legally required to enter into a contract with them.
The trust might grow as a series of contracts are completed or even within the contract duration. It is normal for customers to be skeptical of new providers until they have obtained evidence establishing their reliability. Compared to the private sector, which some local government managers immediately suspect is motivated by profit, the nonprofit sector may occasionally be more trustworthy.
Risk-Sharing
Risk is shared in an OCR relationship based on fairness standards. The risk might not be shared in ACR, but risk reception is predetermined. In public service contracts, risk can take three forms: the risk of changing prices, the risk of changing demand volume, and the risk brought on by providers’ innovations. Private-public partnerships are founded on the idea that the contract can divide risk between the public and private sectors and can be written to encourage taking risks (Turhani & Turhani, 2013). Risk mitigation cannot be accomplished by altering contractor behavior in uncertain volumes, such as the water supply of the Elbasan, where the contractor’s revenue is based on the number of customers and the amount of water each uses.
Conclusion
The Elbasan Municipality’s ambition to contract out a significant portion of the work necessary to offer public assistance has occasionally outpaced its ability to make contracts function. This is due to a few structural factors. The first is that a joint venture between two or more enterprises and a local government contract is not the same thing when working together to launch a business venture or complete a project because, in most scenarios, the company’s revenues come from communal funds rather than from clients drawn to the joint venture’s product. Instead of being dependent on market success, the available financing is limited and subject to renegotiation as expenses grow.
Second, information impacted ness is essentially unavoidable. No of the industry, the contractor is more likely to have the competence than the buyer because that is where people may make the most financial gains and experience the highest levels of professional fulfillment.
References
Turhani, A., & Turhani, A. (2013). Managing through contracts (a case study municipality of Elbasan, Albania). Folia Pomeranae Universitatis Technologiae Stetinensis. Oeconomica, (73).
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