Ownership choice, contracts and regulation: forestalling ownership irrelevance : a law and economics perspective

Long-term contracts are necessarily incomplete in that they cannot unambiguously specify the rights and obligations of the contracting parties and, thus, contractual outcomes are not entirely governed by the explicit contract but, crucially so, by ex-post bargaining. The ex-post bargaining process, however, can be costly to an extent that it may frustrate the investment and efficiency objectives of a concession-based privatization. Drawing on the legal doctrine of commercial impracticability, this article explores a partnership approach to designing and enforcing a concession contract to induce mutual cooperation and, consequently, make the shift from public management to sufficient private ownership significantly welfare-enhancing. The concession-based privatization of water service delivery in Metro Manila, Philippines is used as an illustrative case study.